Financing & appraisal

a. The Finance Process
b. Costs when buying a home
c. Title Insurance- Why you need it and what it covers

a) The Finance Process:

I. Preparation. Where do you begin to secure finances for purchasing a new home, refinancing an existing home, purchasing your dream ranch, or obtaining a real estate equity line of credit? Providence Properties can help. Obtaining a real estate loan can be confusing. You can simplify the process and avoid a lot of potential headaches by getting off to a good start. Here are a couple of ways to do so:

  • Build your “Green File”. Organizing and compiling all your pertinent financial documents into a ‘green file’ (think ‘green’ for money) is an absolute must for any potential borrower. Your green file is a resume or profile that will give lenders an idea of what kind of debtor you might be. The typical green file should contain:
    • Financial statements
    • Bank accounts
    • Investment records
    • Credit card information
    • Auto loans
    • Other indebtedness
    • Recent pay stubs
    • Tax returns for two years

Another means by which lenders gauge your trustworthiness as a borrower is through your credit rating. Credit ratings track your credit history, which includes such crucial information as the number of your open loans and the punctuality of your payments.

  • Treat your credit like gold. Credit ratings are important because they determine whether or not you will be approved for a loan and what your interest rate will be. Thus, you cannot take your credit rating seriously enough! We suggest checking your credit reports at least once a year or before making any major purchase to ensure the accuracy of the information.
    • What the scores means. Ratings usually vary between 400 and 800. Anything above 620 is good. If you exceed 680, you are considered premium and may even get a lower interest rate.
    • Determine your credit rating. You can do this by contacting a credit reporting agency such as Equifax, Experian or Trans Union. Above all, don’t hesitate to consult with your lender if you need to improve your rating.

Buying real estate wisely is all about credit and interest terms.

  • Prioritize your Costs. Down payments, closing costs and additional expenses (such as surveys and inspections) should be at the top of your list. On the other hand, be sure to pay down on your current revolving and high-interest rate debts, such as credit cards, because this will influence your credit rating and interest rate.
    • Remember: lenders like stability. Instill confidence in your potential lender by avoiding any big, sudden moves both in your career and your finances. If that job change or big budget purchase absolutely cannot be postponed, check with your lender first and consider the consequences.

II. Selection.

  1. Choose a Lender (Mortgage Company). Securing finances requires a decision that you may have to live with for many years-so spend time comparing the terms and conditions of different lenders, before making your choice. There are a number of ways to find a willing lender, whether through traditional print ads, Realtor referrals or Internet sources. There are also several considerations to keep in mind when shopping for the right lender and program:
    • Price. Consider the competitiveness of a lender’s terms with that of others, especially for mortgage rates, interest rates, and additional closing costs and points.
    • Diversity of products. Price is important but by no means should it be your only determining factor. How extensive is the lender’s range of offered loan programs? Check the availability of the loan program most appropriate to your credit profile and property.
    • Rapport. Do your lenders and brokers communicate effectively and thoroughly? Are they attentive and prompt? You aren’t looking for just a guide but a partner -someone you can work with and trust every step of the way.
    • Connections. Check whether the lender has access to local loan approval committees that understand your goals as a borrower.
  2. Choose a Loan. Though there are many different kinds of loans available today, these three are the most commonly used:
    • Fixed loan. This long-term option requires monthly payments that will remain the same (fixed) throughout the duration of the loan. The loan term may vary from fifteen to thirty years.
    • Adjustable rate mortgage (ARM). The loan rate here will be determined by factors such as the Federal Funds rate index, readjustment intervals, and capitalization rate. The initial interest rate can be as much as 2 to 3 percent lower than a comparable fixed rate mortgage. This can make homeownership more affordable. However you should first examine all factors and consider the downside risks before selecting this option.
    • Hybrid loan. Also known as an intermediate or convertible ARM, it offers a fixed interest rate for a specified initial period before it ‘switches’ to an ARM and adjusts with the market every six months or every year thereafter.

Consult with your lender and Providence Properties to determine which loan type and program best would correspond with your resources and needs.

III. Understanding Financing. Don’t be intimidated by the jargon used in financing. Here are a number of key terms you’ll see frequently in your loan application process.

  • Credit report. Request your lender to order one from a third party credit agency such as Equifax, Experian or Trans Union. A credit report should contain information on all your outstanding loans and repayment history, and will typically cost fewer than fifty dollars.
  • Application/processing fee. This is the lender’s fee for determining your capacity as a borrower and will usually be charged upon closing of the loan. Expect a price tag of a couple of hundred dollars.
  • Annual percentage rate (APR). The APR expresses the sum total of all your borrowing costs as an interest rate percentage charged on the loan balance.
  • Indexes. Changes in indexes such as the Federal Funds Rate and the Treasury Bill are used to periodically readjust the interest rates in adjustable rate mortgages (ARMs).
  • Points. When mortgage companies are competing by offering lower interest rates, they may charge you a “point,” a one-time pre-paid interest fee, calculated as a percentage of the loan. Points are considered part of the cost of credit to the borrower, and part of the investment return to the lender. They may range from 0.25% to 2% of the loan balance, and are usually paid up front. One point equals 1%.
  • Appraisal cost. This is the fee charged by an independent appraiser who may be hired by your lender to evaluate the property’s purchase price, condition and in relation to similar recent neighborhood sales. This information is necessary to the lender because it ensures repayment in case the borrower defaults, forcing the lender to sell the property.
  • Miscellaneous fees. Various costs will be incurred during the processing of your loan request, such as notary, courier, county recording fees and title company escrow fee.
  • Pre-payment penalties. A prepayment penalty is a provision of your contract with the lender that states that in the event you pay off the loan early, you will pay a penalty. Penalties are usually expressed as a percent of the outstanding balance at time of prepayment, or a specified number of months of interest. They often decline or disappear altogether with the passage of time.
    • Pre-Approval. How is pre-approval different from pre-qualification? What are the advantages of each and which option would be the best for you?
      • Pre-Qualification. This is an assessment by the lender, based on certain basic information given by the borrower (e.g. employment, income, asset information, current monthly debt, and credit worthiness). Based on this quick evaluation the lender makes a tentative decision to pre-qualify the borrower for a certain loan amount. This does not commit the lender to a loan; rather it is only an opinion of the lender.
      • Pre-Approval. Like a pre-qualification, a pre-approval involves a lender making an assessment of a borrower’s buying capacity based on her or his income. But unlike a pre-qualification, a pre-approval letter also checks the applicant’s credit and is a surer verification of a borrower’s income. It takes longer to process and will require more comprehensive documentation, but gives a clearer and more definitive guarantee of the loan amount a borrower is entitled to.
  • Why Choose Pre-Approval? It’s advisable to go straight to a pre-approval for several reasons. A pre-approval can strengthen your purchasing power as a far more accurate evaluation of how much house or real estate you are capable of buying. The pre-approval will be more appealing and thus perform better than a pre-qualification in a competitive sellers’ market. It’s also more time-effective since it reduces the time your lender will need to process and fund your loan.

IV. Application and Processing.

  • Brokers and Lenders: Telling the Difference. The lender or creditor is the party who:
    • disburses or provides funds to the borrower at the end of a successful loan application process,
    • receives the note attesting the borrower’s obligation to repay.

The broker, meanwhile, acts as an intermediary between the borrower and the lender and serves as the applicant’s main contact throughout the process. The mortgage broker usually receives a service fee from the lender for customer services rendered.

  • Loan application forms: Where to Find Them. Most forms can be downloaded from a lender’s website. Fill out all forms accurately and completely, and contact your lender for any questions or clarifications.
  • Documentation: Keeping your Papers in Order. It is highly recommended to keep an organized file containing both originals and copies of all documents accumulated throughout the entire application process. These will include:
    • 2 years of W-2 forms from your employer, or 2 years of tax returns for those who are self-employed
    • Recent pay stubs
    • 3 months of bank and money market statements
    • Brokerage, mutual fund and retirement account statements
    • Proof of other income sources (alimony, trusts, rental income, etc.)
    • Credit card statements
    • Auto /boat / student / miscellaneous loans
    • Drivers’ license or form of ID
    • Copies of visa or green card (for non-US citizens)
    • Copies of existing mortgage debts (for those applying for a home equity line of credit or another mortgage)
  • Underwriting: keeping in touch. Underwriters, hired by lenders, are analysts who examine all the data from a borrower’s property and transaction, and ultimately determine whether or not mortgages should be issued to the applicant. Loan approval committees will use underwriters’ reports during their deliberations to evaluate the property and the applicants’ creditworthiness. Your broker may contact you frequently in the course of the loan application process, so prompt communication is necessary to keep the process running smoothly.

V. Funding.

  • Signing. Here comes the best part. Once your lender has agreed to close or fund your loan, the signing can begin. Before this happens, however, be sure to verify and finalize all the documents, and to supply any additional requirements (such as photo IDs or cashiers’ checks). The final loan documents are usually signed in the presence of an escrow officer or a notary at a title company.
  • Wiring Funds. Your down payment is either automatically deducted or wired-in the latter case; the money is electronically transferred between financial companies. Make sure that the wiring instructions as well as all important numbers must be clarified and checked for accuracy by both parties.

Give yourself a pat on the back. Your loan is now funded! Tie up any loose ends by confirming the money transfer with your broker and filing all pertinent documents of the transaction.

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b) Costs when buying a home:

“The last thing you need are unbudgeted financial obligations cropping up hours before you take possession of your new home.”
________________________________________

Whether you’re looking to buy your first home, or trading up to a larger one, there are many costs – on top of the purchase price – that you must figure into your calculation of affordability. These extra fees, such as taxes and other additional costs, could surprise you with an unwanted financial nightmare on closing day if you’re not informed and prepared.

Some of these costs are one-time fixed payments, while others represent an ongoing monthly or yearly commitment. Not all of these costs will apply in every situation; however it’s better to know about them ahead of time so you can budget properly.

Remember, buying a home is a major milestone. Whether it’s your first, second or tenth home, there are many important details to address, during the process. The last thing you need are unbudgeted financial obligations cropping up hours before you take possession of your new home.

Read through the following checklist to make sure you’re budgeting properly for your next move.

Appraisal Fee

Your lending institution may request an appraisal of the property which would be your responsibility to pay for. Appraisals can vary in price from approximately $175 -$ 300.

Property Taxes

Depending on your down payment, your lending institution may decide to include your property taxes in your monthly mortgage payments. If your property taxes are not added to your monthly payments, your lending institution may require annual proof that your taxes have been paid.

Survey Fee

When the home you purchase is a resale (vs. a new home), your lending institution may ask for an updated property survey. The cost for this survey can vary between $700- $1,000.

Property Insurance

Home insurance covers the replacement value of your home (structure and contents). Your lending institution will request proof that you are insured as it protects their investment on the loan.

Service Charges

Any new utility that services your hook up, such as telephone or cable, may require an installation fee.

Legal Fees

Even the simplest of home purchases should have a lawyer involved to review all paperwork. Shop around, as rates vary greatly depending on the complexity of the issues and the experience of the lawyer.

Mortgage Loan Insurance Fee

Depending upon the equity in your home, some mortgages require mortgage loan insurance. This type of insurance will cost you between 0.5% -3.5% of the total amount of the mortgage. Usually payments are made monthly in addition to your mortgage and tax payment.

Mortgage Brokers Fee

A mortgage broker is entitled to charge you a fee in order to source a lender and organize the financing. However, it pays to shop around because many mortgage brokers will provide their services free to you by having the lending institution absorb the cost.

Moving Costs

The cost for a professional mover can cost you in the range of:

  • $50-$100/hour for a van and 3 movers, and
  • 10-20% higher during peak demand seasons.

Maintenance Fees

Condos charge monthly fees for common area maintenance such as grounds keeping and carpet cleaning in hallways. Costs will vary depending on the building.

Water Quality and Quantity Certification

If the home you purchased is serviced by a well, you should consider having your water checked by your local experts. Depending upon where you live, determines whether or not a fee is charged, to certify the quantity and quality of the water.

Local Improvements

If the town you live in has made local improvements (such as the addition of sewers or sidewalks), this could impact a property’s taxes by thousands of dollars.

Land Transfer Tax

This tax is applied whenever property changes hands and the amount that is applied can vary.

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c) Title Insurance- Why you need it and what it covers:

The home buying process is, by its very nature, a complex transaction. Title Insurance is an important part of the real estate transaction since it insures you that all liens placed against the prior owners of the property, or documents that will restrict your use of the property, have been fully disclosed to you.

A Preliminary Title Report provides you with an opportunity to review any impediments that would prevent clear title from passing to you.

When reviewing a Preliminary Title Report, it is important to check the extent of the ownership rights or interest you will be acquiring. The most common form of ownership interest is ‘fee simple’ or ‘fee,’ which is also the highest form of interest an owner can have in real estate. Liens, restrictions, and interests of others will be listed numerically as exceptions in the report.

You may also have to consider interests of third parties, such as easements granted by prior owners, which limit use of the property. Some buyers attempt to clear these unwanted items prior to purchase. A list of standard exceptions and exclusions not covered by the title insurance policy is also attached. This section includes items the buyer may want to investigate further, such as laws governing building and zoning.

What Is Title Insurance?
Title Insurance insures owners that they are acquiring marketable title to the property. Unlike casualty insurance policies which insure against future events, title insurance is designed to eliminate risk or loss caused by title defects from past events. Title insurance provides coverage only for title problems that were in existence at the time the policy was issued.

A title insurance policy is a contract of indemnity that guarantees that the title is as reported. If it isn’t, and the owner is damaged at a later date, the title policy covers the insured for loss up to the face amount of the policy.

What Is A Title Search?
Issuing a title insurance policy is an extensive and exacting process. Title insurance companies work to eliminate risks by performing a painstaking search of the public records, or the title company’s own “plant”, where public records, laws, and court decisions pertaining to the property and the parties to the escrow are maintained. This is done to determine the current recorded ownership, recorded liens or encumbrances, and other matters of record which could affect the title to the property. Once a title search is complete, the title company issues a Preliminary Title Report detailing the current status of title.

What Is A Preliminary Title Report?
A Preliminary Title Report contains vital information which may affect the willingness and the ability of the parties to close an escrow. Information includes ownership of the subject property, the manner in which the current owners hold title, matters of record which specifically affect the subject property or the owners of the property, as well as a legal description of the property and an informational plat map.

The Preliminary Title Report indicates the type of title insurance to be offered by the title company, and the exclusions and exceptions from coverage based on the type of title insurance policy the company intends to issue. Exclusions and exceptions can include items such as: recorded deeds of trust, easements, agreements, and covenants conditions and restrictions, commonly referred to as CC&Rs.

What Should Be Looked For In A Preliminary Title Report?
As your real estate representative, we will review the Preliminary Title Report as soon as it is issued, paying particular attention to the following items:

  • Verifying the ownership vesting by insuring that the names on the report are the same as the names on the purchase contract. Sometimes the name of an unexpected owner will appear (i.e. a previous spouse or relative who died), and corrective documents may be required.
  • Verifying that the property address, the plat map, and legal description all match. An owner could own two properties adjacent to, or across the street from, each other, causing confusion in identifying the correct property.
  • Reading the informational notes for pertinent items about the property, such as: transfer taxes, monument fees, homeowners’ association fees, etc.
  • Carefully reviewing the exceptions. Common exceptions include: current taxes, bonds, deeds of trust, Mello-Roos Assessment District items, CC&Rs, and easements. Be sure the CC&Rs or existing easements don’t interfere with the buyer’s future plans. For example, an easement across the backyard could have a profound effect on the buyer’s ability to add a swimming pool at a later date.
  • Always looking for surprises. If you can’t locate an easement, or an unexpected deed of trust shows up, or you see an item you weren’t aware of before, immediately call the escrow officer or title company to discuss the matter. The title company should be a problem solver, and top-notch escrow officers and title companies go out of their way to resolve quickly the majority of “red flag” items. However, the responsibility for early detection and resolution of problems falls on the entire escrow team, including the agents, the escrow and title company, and sometimes the buyers and sellers as well.

What Is Covered?
Not all risks can be eliminated by a title search, since certain “hidden defects”, such as forgeries, identity of persons, incapacity, incompetency, and failure to comply with the law, cannot be disclosed by an examination of the public records. While the Preliminary Title Report is an offer to insure under certain circumstances, the Title Insurance Policy is a contract, providing coverage against such “hidden defects.”

In addition to indemnifying the insured against losses which result from a covered claim, the policy also provides for legal fees and defense for future claims against the property.

Extended owners’ and lenders’ policies of title insurance provide broader coverage and are available through the American Land Title Association (ALTA). Coverage is extended to certain matters that are “off-record”, but which are generally discoverable by an inspection of the property or by questioning the parties in possession. These include:

  • Unrecorded liens and encumbrances
  • Unrecorded easements
  • Unrecorded rights of parties in possession
  • Encroachments, discrepancies, or conflicts in the boundary lines

ALTA policies are available for owners and lenders, and a “plain language” ALTA Residential Policy is also available for residential property containing one to four units.

Agents, buyers, and sellers should not assume that all title insurance policies and title companies are the same. They aren’t, and it is important to ask questions of your title company to determine the type and cost of coverage available.

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