Purchasing real estate is a complex matter. At first it might seem to buyers that by attending local open houses or visiting online sites you can quickly find the right home at the right price.

But, you will soon find a basic rule in the Baltimore market is that all properties are unique.  Homes differ and so do contract terms, financing options, inspection requirements and closing costs. And, no two transactions are alike. Amidst this maze of forms, financing alternatives, inspections, appraisals, pricing options and negotiating, it makes sense to work with a real estate professional.

The following links contain a series of articles, specifically-designed to introduce some of the basic questions and preparatory steps associated with purchasing a new home in the Baltimore market.

If you are looking for a home in Baltimore or planning to relocate to the Greater Baltimore region, I will personally work with you to help you Find Your Dream Home and make your home buying needs my #1 priority -- contact me today for more information.

Articles

• How Much House Can I Afford?
• Financing 101: Terms You Should Know Before Making an Application
• Pre-Qualification vs. Pre-Approval
• Down Payments: Lining Up the Cash
• Buying a Home in a Buyer’s Market
• What Are the Advantages of Using a Realtor®?
• How Does My Real Estate Agents Get Paid?
• Important Real Estate Terms You Really Need To Know

How Much House Can I Afford?

The price of home that you can afford to purchase rests on two things: the amount of money that you can invest in the down payment, and how much you can afford for the monthly housing payment

A homeowner’s monthly mortgage payment is comprised of four components: a principal payment on the mortgage loan, an interest payment on the mortgage loan, as well as property taxes, and insurance (commonly referred to as PITI).  Descriptions of each of the four have been included below.

• Principal:  The amount of the payment that goes towards paying down the loan amount. Since, for most loans, part of your mortgage payment gets applied towards principal, over time, your outstanding principal balance will go down.

• Interest: The interest rate lenders charge is the cost of the borrowed money. The interest and principal payments equal your monthly mortgage payment.  In the early years of your loan, the majority of your payment is applied toward interest.

• Taxes: The local government where the home is located will assess your home and determine its real estate taxes. Most lenders will collect this as part of your monthly payment and then pay your local government on your behalf. This is commonly referred to as tax escrow.

• Insurance:  Homeowner’s insurance (or hazard insurance) covers you in the event of damage to your property caused by fire, wind, or other hazards. Like the property taxes, many lenders will escrow for this expense and pay it annually on your behalf.

Financing 101: Terms You Should Know Before Making an Application

If you are new to the home purchase process or have not purchased a home in during the last several years, you will find that there are numerous mortgage options out there for buyers.

Shopping for a Mortgage

A conventional mortgage is a loan to purchase property made between a lending institution and a borrower without a third-party participant, such as the FHA or VA. Most types of conventional loans are paid off over 15, 25, or 30 years.  Conventional mortgages can have fixed or adjustable rates.

Terms of a conventional loan vary among lenders, but basically a loan can be obtained even without a down payment. When the down payment is less than 20%, it is often necessary for the loan to have private mortgage insurance (PMI) to protect the lender. Private mortgage insurance (PMI) is insurance written by a private company that protects the lender from losses in the event the borrower defaults on the mortgage. Borrowers are required to pay the premium for private mortgage insurance. Private mortgage insurance limits a lender's exposure to financial loss resulting from loan default.

Conventional mortgages can be conforming or non-conforming. The conforming loan limit, for 2006 is set at $417,000 for single-family homes ($625,500 in Alaska and Hawaii). Mortgages larger than this amount; or that have other features that put them outside Fannie Mae and Freddie Mac criteria, are called non-conforming or jumbo loans.
  
If you or your spouse is a qualified veteran, you can apply for a Veteran’s Administration (VA) loan guaranteed by the Department of Veteran Affairs. Under this program, eligible veterans can receive a mortgage loan up to $417,000 with no down payment. Higher loan balances may require a down payment.

With a Federal Housing Administration (FHA) loan, the Federal Housing Authority insures federally qualified lenders against any default payments by the borrower. While the down payment can be as low as 2.25% of the purchase price, the FHA charges the borrower an up-front mortgage insurance premium (MIP) fee. Prepaid interest, called points, may also be charged by the lender.

FHA does not require a minimum credit score for loan approval. In addition, one may not be turned down for an FHA mortgage solely for lack of credit history.  The buyer’s entire cash investment – as little as three percent – can be a gift from a family member, employer, charitable organization or local government entity.  Finally, the seller can contribute up to six percent of the home’s price toward closing costs through a seller’s concession.

Fixed-Rate Mortgages vs. Adjustable Rate Mortgages

Fixed-rate mortgages give you the security of knowing your monthly principal and interest payment will not change over the life of the loan. This type of mortgage also protects you from rising interest rates. No matter how high market interest rates go, your mortgage rate remains the same.

Fixed-rate mortgages are generally recommended for people who:

• Prefer regular payments with no surprises
• Are on limited or fixed incomes
• Plan to stay in their homes a long time
• Are buying a home at a time when interest rates are comparatively low

An adjustable-rate mortgage (ARM) has an interest rate that is fixed for the first one to 10 years and then adjusts periodically based on financial market conditions. During the initial fixed period, an ARM has a lower interest rate than a comparable fixed-rate mortgage, so you’ll save on your monthly payments during the early years of your loan term. Because this type of conventional mortgage offers lower upfront monthly payments, it can help you:

• Buy a more expensive home. Because your maximum loan amount is based on the initial monthly payments, you may be able to borrow more.

• Manage your cash flow in a high-rate environment. If you are buying a home at a time when interest rates are comparatively high, an ARM can help you avoid making high monthly payments right away.

• Plan for future income growth. An ARM can help you keep your payments low while your income increases during the loan’s fixed period.

• Potentially improve your credit standing. The lower initial rate can make your payments easier to manage, helping you improve your credit and expand your financing opportunities if you make timely payments on your mortgage loan and other credit obligations.

• Save money if you expect to move or refinance. If you plan to move or refinance before the end of the loan’s initial fixed period, you can take advantage of an ARM’s lower payments without worrying about future rate increases.

Pre-qualification vs. Pre-approval

Knowing your affordable price range will bring your house hunting into focus. How much money you qualify for will depend on a variety of factors including credit history, length of employment, and down payment amount.

Based on information you provide, your lender can estimate how much money you can borrow before applying for a loan. This non-binding process is called pre-qualifying.

Your lender can also take a detailed look at your financial and credit profiles (including a credit check) and commit to lending you a specified amount of money pending specific property details. The lender will then provide you with a letter stating how much mortgage you qualify for. This process is called pre-approval.

With a pre-approval letter, you can:

• Shop for a home with the confidence of knowing exactly how much you can afford.
• Show sellers you are serious about buying and that you can afford to make a purchase.
• Discover any qualification issues early in the home buying process.

Because a pre-approval takes a closer look at your background and includes a credit check, it holds more weight with sellers than pre-qualification.

Down Payments:  Lining Up the Cash

The traditional source of money for your down payment is either your savings or the proceeds from the sale of a home you already own.

However, many first-time buyers to do have access to these types of alternatives, but they can still afford to purchase a home in their price range by using a wide variety of local home buyer incentive programs.  Whether moving to Baltimore City or the County, there are a variety of programs offered by non-profit organizations providing grants and gift funds to new home buyers.  Often, the funds are available in exchange for attendance at a 2-3 hour home buyer seminar.

If this route is not a desirable alternative for you, there are some other not so obvious sources.

Home Equity Loan: Parents often have considerable equity built up in their own homes, and through a home equity loan, can gift a down payment for a home to their children. Often lenders will require a “gift letter” to verify the parents don’t expect repayment. In return for providing a part of the down payment, the parents (or another investor) share in the profit or net equity of the house when it is eventually sold. Ask your tax advisor for current information.

Stocks, Bonds, & Mutual Funds:  You may be able to secure a bank loan using your portfolio as security, without selling your stocks and bonds.

Company Profit Sharing or Savings Plan: Look into the possibility of withdrawing or borrowing against what you have in your employer’s profit sharing or savings plan account.

Finally, a word of caution, don’t plan to put your last penny down on the closing table. Of course, the larger the down payment, the less money you need to borrow, however, you will still need money for closing costs, moving, setting up your new home, and other miscellaneous expenses.  Be sure to keep this in mind as you move forward with your purchase decisions.

Buying a Home in a Buyer's Market

When is the best time to buy a house? With many markets reporting an abundance of homes for sale, and interest rates remaining at near historic lows, now might be one of the best times in recent memory. While today’s real estate market does offer advantages to buyers, consumers still need to be savvy in order to get the best deal they can.
 
Following are some things that I, as a real estate professional, believe every homebuyer should keep in mind: 

• Don’t Try to ‘Time’ the Market. When home prices are lower, it is very tempting for potential buyers to try to wait as long as possible in the hopes that prices will decline even further. This strategy can be detrimental because when there is high inventory, smart sellers price their homes properly – not according to past sales but according to current conditions – so their homes will sell in a timely fashion. Once a home is priced to what the current market will bear, buyers will make offers.

• Shop Around. But Don’t Wait Too Long. The National Association of REALTORS (NAR) reports that, on average, homes stay on the market for 7.5 months. The increased inventory gives homebuyers a great opportunity to compare homes that meet their needs. However, this does not mean that homebuyers should procrastinate. If you find a house you love, put in your bid and negotiate. Don’t provide an opportunity for another buyer to make an offer.

• Watch Mortgage Rates. Studies revealed that that majority of people move based on lifestyle changes such as new job, marriage, divorce or family expansion. Pay attention to the mortgage rates and recognize that buying a new house will likely result in a change in mortgage rates. How much? A monthly payment of a 30-year fixed 5.875 mortgage rate on a 300,000 loan is $1,774.61. The monthly payment at today’s 6.381 rate is $1,872.79, representing a $98.18 increase.

• Negotiate on the Incentives.  Sellers eager to move their homes may offer you a variety of incentives such as closing costs, repair escrows, and home warranties. If you accept an incentive, make sure it makes sense for you. Instead of these options, you may opt to have the seller make one or two repairs prior to closing. Of course, you can always ask the seller to simply deduct the amount in question from the list price.

What Are the Advantages of Using a Realtor®?

With all the tools and advice available today ranging from books and magazines to online advice, it would theoretically be possible to buy a home almost completely without the aid of real estate professionals.
This not necessarily recommended. The housing market is basically local, and each state, city, and sometimes neighborhood has a thicket of local laws or customs that you need to understand. For that, it helps to have a team of professionals to guide you.
While some 85% of sellers list their homes through an agent -- those listing agents are working for the seller and have committed to getting the seller the best possible price for their home.
In order to protect your interests as a buyer, you should consider hiring what is known as an "exclusive buyer agent."  A buyer's representative has the same access to homes for sale that a seller's agent does, but his or her allegiance is supposed to be only to you.

Another advantage of enlisting the help of your own agent is simply that you don’t have to “go it alone.”  A good agent has the training, know-how, and experience to help you through each step of the process and to make the process of finding, buying, and moving into your new home as smooth, quick, and enjoyable. 

The following is a list of many of the services regularly provided by me to help my clients feel comfortable with the process of finding and purchasing a home.  Please do not hesitate to ask me to help you perform any of the below listed services:

Pre-Purchase

• Provide ideas for alternate methods of finance or purchase.
• Review your financial and personal plans as they relate to real estate.
• Assist in developing a prioritized list of home selection criteria.
• Provide a sample copy of the purchase agreement for you to study.
• Provide a list of neighborhoods in your price range.
• Explain how the Realtor Multiple Listing System (MLS) works.
• Arrange to show the homes you pre-select.
• Explain real estate terminology throughout the home buying process.

Offer Presentation & Contract Negotiation

• Make sure that events and conditions agreed upon in the contract can be realistically performed within time limits provided.
• Explain how offers to purchase property are presented.
• Recalculate costs and monthly payments, in the event of a counter offer from the seller.

Home Inspections & Transaction Processing

• If requested, provide a list of reputable companies for home and environmental inspection.
• Help interpret which report items are relatively minor and which require further clarification.
• Re-negotiate with seller to pay for items shown to be deficient in reports.
• Arrange for repairs, as necessary.
• Gather information about any items disclosed which may be of concern.
• Rewrite the contract, as needed.
• Obtain a receipt or deposit the purchaser’s contract deposit.
• Closely follow deadlines listed in the contract.  Errors in timing can nullify the agreement.
• Work with lender to provide information and approvals as stipulated.
• Provide regular updates on the closing progress to buyer, as required.
• Explain the provisions of and order a Home Warranty Plan, if requested.
• Explain Home Owner’s insurance requirements.

Pre-Settlement Activities

• Provide a list of reputable moving companies, as requested.
• Help buyer locate temporary housing, as needed.

How Does My Real Estate Agent Get Paid

The real estate commission is an amount, usually a percentage of the property sales price, which is collected by a real estate professional as a fee for helping buyers identify a desired property for purchase and more importantly, structure the terms of the transaction.

There is no standard commission rate. Commissions are not set by law, but are negotiated, and may vary depending on services, customer needs, and company policy. In general, Baltimore area buyer agent commission agents charge between 2.5% and 3.5% of the property sales price.

The following is a list of many of the services regularly provided by me to help my clients feel comfortable with the process of finding and purchasing a home.  Please do not hesitate to ask me to help you perform any of the below listed services:

Pre-Purchase

• Provide ideas for alternate methods of finance or purchase.
• Review your financial and personal plans as they relate to real estate.
• Assist in developing a prioritized list of home selection criteria.
• Provide a sample copy of the purchase agreement for you to study.
• Provide a list of neighborhoods in your price range.
• Explain how the Realtor Multiple Listing System (MLS) works.
• Arrange to show the homes you pre-select.
• Explain real estate terminology throughout the home buying process.

Offer Presentation & Contract Negotiation

• Make sure that events and conditions agreed upon in the contract can be realistically performed within time limits provided.
• Explain how offers to purchase property are presented.
• Recalculate costs and monthly payments, in the event of a counter offer from the seller.
  

Home Inspections & Transaction Processing

• If requested, provide a list of reputable companies for home and environmental inspection.
• Help interpret which report items are relatively minor and which require further clarification.
• Re-negotiate with seller to pay for items shown to be deficient in reports.
• Arrange for repairs, as necessary.
• Gather information about any items disclosed which may be of concern.
• Rewrite the contract, as needed.
• Obtain a receipt or deposit the purchaser’s contract deposit.
• Closely follow deadlines listed in the contract.  Errors in timing can nullify the agreement.
• Work with lender to provide information and approvals as stipulated.
• Provide regular updates on the closing progress to buyer, as required.
• Explain the provisions of and order a Home Warranty Plan, if requested.
• Explain Home Owner’s insurance requirements.
  

Pre-Settlement Activities

• Provide a list of reputable moving companies, as requested.
• Help buyer locate temporary housing, as needed.
• Coordinate move out by seller and move in by buyer.
• Conduct a final “walk through” property inspection to assure that nothing significant has changed since the Purchase Agreement was signed.
• Make arrangements to rectify any problems discovered during walk through.
• Provide written explanation of the various ways to hold title to real property.

Important Real Estate Terms You Need To Know

Before you buy a piece of property, you should familiarize yourself with the terms of the business so that you will be speaking the same “language” as the professionals in the field! 

While these definitions may be somewhat different than could be found in a dictionary (to a text book type definition of each term), what is presented here are the general meaning understandings for the terms set out.

Adjustments: Adjustments may be property taxes (either unpaid or paid in advance), electricity, gas or other fuel, condo fees, or mortgage interest already paid out for future service.  These must be pro-rated and be credited on closing to the appropriate side of the transaction.  This can involve an expenditure of several hundred dollars payable on the closing date when the sale is completed.

Agreement of Purchase and Sale (Offer to Purchase): A contract by which one party agrees to sell and another agrees to purchase.  The contract may be firm (no conditions attached) or conditional (certain conditions must be fulfilled).

Amortization Schedule: A schedule, which, if met, will lead to the extinguishing of debt, with equal payments at regular intervals over a period of time. (For example – an amortization schedule may separate out the monthly portions for both principal and interest and how much of the allocated to each.  It also shows the unpaid principal balance).  The amortization is the number of years that it will take to pay off the loan, were the interest rate to remain constant.

Appraisal:  An estimate of quantity, quality, or value.  The process through which conclusions of property value or property facts are obtained; also commonly the report setting forth such estimate and conclusion.  Many appraisals are done for mortgage lending purposes and may not match the sale price of the property. 

Assessed value: A valuation placed upon property by the state, as a basis for municipal taxation.  In the recent past and in some areas currently, a local/municipal assessor may assess the value.

Assumption of Mortgage: When a purchaser takes ownership encumbered with a mortgage he may assume the responsibility as the guarantor for the unpaid balance of the mortgage.  Such a purchaser is liable for the mortgage repayment.

Buy down: Used in conjunction with the lowering of the rate of interest to be paid during the term of the mortgage by the advanced payment of a portion of the interest rate.  Often the vendor effectively lowers the interest rate of a mortgage by prepaying a portion of the interest to be paid during the term of the mortgage.      

Chain of Title: The succession of conveyances from some accepted starting point whereby the present holder of the real property derives his title.

Closing:  The point (in time) of a real estate transaction when the seller transfers title to the purchaser in exchange for the purchase price.

Closing Date: The date specified in the Agreement of Purchase and Sale when the purchaser delivers the balance of money due and the seller delivers a deed and vacant possession of the property (unless otherwise agreed).

Closing Statement: A listing of the debits and credits of the purchaser and the vendor to a real estate transaction for the financial settlement of the transaction.

Commission:  Payment for the performance of specific duties; in real estate, usually payment measured by a percentage of another sum – as a percentage of the sale price paid for selling a property.

Condition:  A condition in a contract calling for the happening of some event or performance of some act before the agreement becomes firm and binding on all the parties.

Conditional Offer: An Agreement of Purchase and Sale may be subject to specific conditions.  These conditions could be the arranging of a mortgage, home inspection or the selling of an existing home.  There is always a time limit stipulated within which the specified conditions must be met.

Condominium:  A form of property ownership providing for individual ownership of a specific apartment or other space not necessarily on the ground level together with an undivided interest in the land or other parts of the structure in common with other owners.

Contract:  An agreement entered into by two or more parties by the terms of which one or more of the parties, for a consideration, undertakes to do or refrain from doing some act or acts in accordance with the wishes of the other party or parties.  A contract to be valid and binding must (1) be entered into by competent parties (2) be bound by a consideration (3) possess mutuality (4) represent an actual meeting of the minds and (5) cover a legal and moral act.

Covenant:  An agreement written into deeds and other instruments promising performance or non-performance of certain acts or stipulating certain uses or non uses of the property.

Deed:  An instrument in writing which, when executed and delivered conveys an estate in real property, signed by the vendor and purchaser, transferring ownership.  This document is then registered against the property as evidence of ownership.

Deposit: Payment of money or other valuable consideration as pledge for fulfillment of contract; may be given as a “piece of paper” when the offer is signed and converted to a bank draft or other form of payment once the offer has been accepted.

Easement:  The unauthorized extension of boundaries of land (for example, when a homeowner puts up a fence over the lot line and “takes over” some of the neighbor’s property).  The act of trespassing upon the domain of another and may be a partial or gradual invasion or intrusion.

Encumbrances:  Outstanding claim or lien recorded against property or any legal right to the use of the property by another person who is not the owner.  Restrictions, easements and reservations are encumbrances, although not liens.

Estate:  A right in property.  An estate in land is the degree, nature or extent of interest which a person has in it.

Fair Market Value: The highest price, in terms of money, that the property will bring to a willing seller, if exposed for sale on the open market while allowing a reasonable time to find a willing purchaser, buying with the knowledge of all the uses, and with neither party acting under necessity, compulsion or peculiar and special circumstances.  Fair Value: Value that is reasonable and consistent with all the known facts.

First Mortgage: A mortgage, which has priority as a lien over all other mortgages.

Home Inspection: Examination of the house by an expert selected by the purchaser.

Insurance: Before the transaction can be closed, the purchaser must have home insurance arranged and in effect.

Lien:  A charge against property whereby the property is made security for the payment of a debt.

Mortgage Discharge: The removal of a mortgage as a lien against the property and is normally accomplished by repaying the debt (and any interest including any penalty, if any).  A document should be obtained from the entity to which the debt was owed.  The document should be recorded on the property’s title.

Multiple Listing Service (MLS): The system in which participating brokers agree that they will offer others (agents) the opportunity to market to varying degrees properties listed with them for sale, lease, or exchange and to pay a stipulated commission to the cooperating broker.

Option Agreement: A document stipulating that, in exchange for the payment of a sum of money or other consideration, a specified individual is to be given first chance of buying a property within a specified period of time.  If the option-holder does not buy within the specified time, he loses his right and the sum so paid.

Permanent Fixtures: Permanent improvements to property that may not be removed upon the sale of the property (furnace, central air conditioning, pool, windows, etc.), unless specifically set out in the Agreement of Purchase and Sale.  Usually affixed to structures or land in such as manner that they cannot be independently moved without damage to themselves or the property housing supporting or pertinent to them.

Power of Attorney: Written instrument authorizing a person to act for another.

Real Estate: Includes real Property, leaseholds or a business whether with or without the building, fixtures, stock-in-trade, goods or chattels in connection with the operation of the business.

Real Estate Broker or Agent: An intermediary between the buyer and the seller who is licensed in the state to carry out such activities.

Real Property:  (1) The combination of the tangible and intangible attributes of land and improvements.  Value-wise, it is the sum of the value of the real estate, considered as land and structure and, for example, the tangible value arising by reason of a favorable lease; (2) the real estate plus the rights that go with it;   (3) Property and what is on it (immovable).

Survey:  (1) The accurate mathematical measurement of land and buildings thereon, made with the aid of instruments.  (2) The process of ascertaining the quantity and/or location and boundaries of a piece of land.  It may include physical features affecting it, such as grades, contours, structures, etc., a statement of the course, distance and quantity of the land.

Title:  The means of evidence by which the owner of land has lawful ownership thereof; the union of all the elements, which constitute proof of ownership.

Title Insurance: An agreement binding the insurer to indemnify the insured for losses sustained by reason of defects in the title to the real estate.

Trust Account: Bank account set up by a broker to deposit funds entrusted to him by his buyer.

Zoning:  Government regulation of land use; regulation by local government under police power of such matters as height, bulk, and use of buildings and use of land intended to accomplish desirable social and economic ends.