Finding a Fixer-Upper
Not always an easy task, as most “fixer-uppers” are beyond fixing up. One common resource for finding valuable fixer-uppers is the foreclosure market. Check your local paper and the Web sites of banks or government agencies. You might, however, find that it is easiest to hire a real estate agent to help you avoid homes that need major repairs or are poor home buys.
Get a Home inspection.
Home inspections are always important, but they are especially critical if you are purchasing a fixer-upper home. Before deciding whether or not to make an offer, hire an inspector and make sure he or she thoroughly inspects the ceilings, roof, electrical system, foundation and walls. For many people, this can be a turning point. If there are major structural problems, you are in for hugely expensive repairs. If, however, the house needs work but there are no structural problems, it is a good bet.
Draw up a budget.
Another step that is important before you make an offer is budgeting. Interview potential contractors and ask them to give you renovation estimates in writing. You will need to add 10% to 40% to your budget to account for unforeseen bumps in the road and last-minute realizations. For instance, once you renovate the master bathroom, it may become clear how dire the guest bathroom is.
Make an offer
A good way to do this is to obtain the sale prices of three homes in the area that are of similar style and size and that sold in the last 90 days. Figure in the cost of your renovations, including your time and actual costs, and also the popularity of the neighborhood. This will give you a good idea of what your potential home might be worth after renovations. From here, you can decide what it is worth to
you before renovations.
At some point after you make an offer and it is accepted, you will need to decide who is going to do what on your list of renovations. Do you have the time and expertise to knock down walls or lay tile? It’s possible that you and your family can do smaller jobs, like removing carpeting or wallpaper, but you decide you need experts to do bigger items. In the end, if you decide to perform the work yourself, make sure you obtain the necessary permits.
Above all, remember that a fixer-upper is a lot of work. But, you may find that it is more than worth it when you are left with the home of your dreams.
How to come up with the down payment
Ask for help. Parents, friends and relatives may all be willing to give you a loan with favorable rates – with parents that often mean no interest rate, and no strict timeframe. If a loan (or gift) doesn’t seem feasible, maybe they would be willing to co-sign the loan.
Use your other assets – either by selling them, or by borrowing money against them. This can include things like cars, boats or bicycles, as well as stocks, or trinkets, such as heirlooms, or vintage trading cards.
If you have life insurance with any built-up value, you could cash in that value, or possibly borrow against it.
If you are a first-time homebuyer, you can take out $10,000 from your IRA, penalty-free, to put toward your home purchase.
You can also borrow against your retirement funds.
Sometimes, you can get help from a non-profit organization, such as a church. There are loans out there that will let you put a lower down payment down, as long as a non-profit organization
puts in part.
Increase your income – you can do this by getting a second job, or doing some freelance work.
If you can make it work, change your withholding taxes in anticipation of being able to deduct the interest. This will give you more take-home pay, which you can start saving!
Offer to give something other than cash for the down-payment. This could include offering the seller something like a car or a boat in lieu of the down payment, or it could be your services; for example, you could offer to do landscaping in the person’s new home, or give them automobile services, or do their taxes!
Finally, you can look for options that don’t require a large down payment. Such options include loan programs such as VA or FHA. Another option is to purchase a foreclosure property, which can often be had with little or no down payment. You can also consider getting an 80:20 loan, where you essentially have two loans; one is the regular mortgage on the property, and the other is a loan for the down payment – even through these are separate loans, they often come from
the same lender.
Know the Details Before You Sign
Usually required by local, state or federal law, you may need to sign several forms that have no material effect on your contract, but simply reflect the fact that you have been told certain things. Examples include a property disclosure, Real Estate Settlement Procedures Act (RESPA) disclosure, federal lead-based pain disclosure, disclosure of brokerage relationship, etc. Not signing these can severely affect the transaction.
If you have bought or sold a house, you probably know how crucial inspections are to the process. There are various property inspections buyers can request, such as pest, home, environmental or termite inspections. Requesting these is usually as easy as checking a box “yes.” Keep in mind that there is also a “no” box and if you do not want an inspection, it is important to check this box rather than leaving it blank, so nothing is left to the imagination of any party. Double-check these items, even if your real estate agent completed them for you.
Other Term Clauses
Three other clauses that need to be spelled out in the contract are home of choice, rent back and escalation clauses. Home of choice and rent back clauses mean that you want to find a home of your choice and that you may want to rent back from the buyer so you have extra time to find the home of your choice. These clauses are important if you don’t want to be stuck in the situation where you have to move out of your old home but haven’t yet found a new home. Remember that renting or staying at a long-term hotel can be expensive. An escalation clause is important if you are escalating your price. For instance, you may say that you’ll outbid any offer by $1,000, but you need to nail down the details so you don’t end up with a price escalation that is far beyond your means. Also remember to make your “top price” your real top price, not just what you think is beyond what anyone might bid. If you want the house, chances are that someone else does too.
As you might imagine from understanding these few components of a contract, it is important to understand the terms of a contract before the actual writing. If you choose to have a real estate agent, make sure you ask him or her to clarify anything you don’t understand. In a home purchase or sale, there are no stupid questions!
Choosing the right REALTOR®
Clean, paint, repair, and generally spruce up your house so that it is ready for people to picture themselves living there. The clutter is put away, and the true charm of your house is revealed.
Obtain a professional inspection, preferably from an inspector that belongs to the American Society of Home Inspectors. There may be other reports that are common to your area, such as energy efficiency. Such a report will give buyers greater confidence, and can cut down a lot of negotiating time, especially if you have addressed any issues the report identifies.
The next step is arguably the most daunting – choosing a realtor. The key here is to interview at least three realtors, so that you can see who in the area is the most realistic and who offers the best plan for selling your home. As part of the interview, make sure you obtain and retain a written comparative market analysis. This analysis will show the recent sale prices of comparable homes, the current listing price of your local competition, and a list of homes similar to yours whose listings have recently expired (probably due to an excessive asking price). After your potential realtor has presented his or her case, make sure you get an understanding of the following areas:
- How long have they been operating in your area?
- When are their days off, and are they going to be taking any vacation soon?
- How is the workload handled? Do they have office assistants? How many listings do they have currently?
- What is their written marketing plan for your home?
- Are they full-time or part-time?
- What do their fees consist of?
- Can they guarantee a sale within a 90-day listing period? (A good idea to cover yourself is to insert a clause that states you are free from obligation if your house is listed for more than 90 days.)
Hopefully, you will have your pick of several excellent realtors that you have interviewed. Even if this is not the case, by asking many questions, you can separate the best, and be happy in the knowledge that your home is being faithfully represented.
How to Get the Highest Asking Price
Finish any unfinished rooms or convert any convertible rooms, such as the basement or a recreational room. Not only does this give an increased amount of usable space, but it can also be used as a sale point, since these are expenses that the buyer won’t have to incur. Offer a free media room. With deals, you can probably have one installed for around $5,000. Media rooms are something many house shoppers see as a neat luxury, and could be the difference between someone going for your house or someone else’s.
You can make the mortgage on your house more desirable by buying down the interest-rate. This is something fairly easy to offer someone, and it certainly makes it harder for someone to take an offer with someone else where they have to pay a higher interest rate. Rather than offering a cash-specific incentive,you can offer something like a vacation. Again, this makes your offer stand out from other offers. Offer seller financing. This is actually not that difficult to do if you can make the deal work, and can actually end up earning you some money. Talk to your realtor
about the possibilities.
Offer to pay their HOA fees for a year. This is a practical buyer benefit. If someone is carefully looking at their budget, then not having to include these fees in their monthly expenses can be a big deal. Offer to pay off some of their debt. If this is done as part of the loan program, then it could lead to the buyer qualifying for a larger loan, or a better interest rate. If just a side agreement, then again, it could mean lower monthly payments, which can be extremely important to the buyer. Finally, you can always offer to pay the closing costs. These tend to be something that is a big hit to buyers’ pocketbooks, and is something people don’t adequately budget for when shopping for
a new house.
Unfortunately, other than the few aesthetically appealing things people can do to spruce up their house, real incentives tend not to be cheap, but they can mean the difference from having to drop your asking price by quite a few thousand, or actually getting what you want! The key to choosing which incentive to go for is to think about what incentive works best for you, and then think about what kind of audience you
are playing to.
Interest and the Calculation of Annual Percentage Rate (APR)
APR is “a method developed under federal law to disclose to loan applicants the actual amount of interest that will be paid on a given loan over the life of that loan.” APR makes comparing one loan to another more simple, although you should always make sure to consider of aspects of a real estate loan before choosing the right loan for you.
You may have heard the term “points” when witnessing or taking part in discussions about loans. A point is a percentage point. Thus, a point is 1 percent of the loan or $2,000 of a $200,000 loan. The two types of points are origination and discount points. Origination points are fees that are normally charged by lenders or mortgage brokers for starting your loan. Discount points are points charged for lowering your interest rate, which lowers your monthly payments.
Both origination and discount points should be considered to be interest that you pay up front. For example: If you have a loan for $120,000 at 9 percent interest for 30 years, and you’re paying one origination point and one discount point, you’re paying $2,400 for those two points, and your monthly payment would be $965.55. To calculate the correct APR on your loan, you have to include that $2,400 in your starting balance, since it is interest, even though it’s prepaid. Your total loan will therefore be $122,400 or $984.00 monthly. To calculate the APR, return to the original loan amount and (don’t worry if this part makes you shudder) “compute the polynomial backwards to reach the interest rate it would take to equal the payment on the total loan.” In this example, the interest rate would equal approximately 9.23 percent.
If that part was confusing, remember this easy rule when considering whether to pay points to lower your interest rate: it will take you about five years to make up the additional point(s) paid and then you will start to save money over the remaining years of the loan. Also, remember that lenders are required by federal law to send you a Truth in Lending (TIL) statement within three days of applying for a real estate loan.
The term or length of a loan is the third part of a loan. Fixed-rate mortgages most commonly appear in 30-year or 15-year terms. There are advantages to both: although you will pay more interest over the life of the loan (about double) on a 30-year mortgage, your monthly payments will be cheaper. However, in the first 15 years of your loan, you will mainly be paying interest while not
building up principal.
Therefore, a 30-year loan is good for long-term stability, but if you can afford a 15-year loan, you will build principal faster and pay less over the long-term. One more option would be to make payments on a 30-year loan as if you had a 15-year loan, which would mean that you pay the loan off in a little over 15 years.
Understanding the three basic components of a loan – the size, interest and term – will help you to take an active part in the home buying process, thereby making it smoother!
Getting the Best Mortgage for You
There are a plethora of loan types out there, but before you start considering 100% financing versus first-time buyer programs versus interest-only loans, there are a couple of other more basic mortgage types that you might want to consider.
There are many reasons why a seller might want to finance the loan themselves, and there are many reasons why you might want to go down this path, including poor credit, the need to negotiate a better interest rate or the desire to avoid mortgage insurance. The bottom line is that if the seller is willing to do this, such a deal will normally only be for a few years, after which time you’ll need to get a regular loan.
Assuming an Existing Mortgage:
Rather than getting a new mortgage, you can sometimes take over the existing mortgage on the house. Some people like this option because it can avoid some of the typical administrative fees charged by mortgage brokers, and it can have a lower interest rate than the real estate market will currently offer. The only problem is that the existing mortgage needs to be transferable, and you will need to somehow cover the difference between the original value of the home, and the current value.
Playing with the Details
There are two main ways to alter the details of your mortgage:
Sounds obvious, but most people tend to think that published interest rates are final. However, as long as you are willing to negotiate, and your credit history is in pretty good shape, then you should be able to get some slightly better terms; a reduction of around a quarter percent of the published interest rate
should be doable.
- Adjusting the Points and Mortgage Length:
There are two big factors that will affect your mortgage payments: (1) the interest rate and (2) the length of the loan. It is important to understand what is right for your current situation by using different loan calculators to see what would happen if you paid points in order to lower your interest rate, or had a 15-year rather than a 30-year loan. A good source of free mortgage calculators is the Yahoo Finance Center, which can be found at:
Closing the Deal
Another thing to consider is a seller concession. This is essentially where you add up to 6% of the agreed-upon house price, which the seller then gives back to you. This money is then used to cover your closing costs. Again, such an option is very dependent on your situation. It does mean having to have a higher mortgage payment, and the house has to appraise for the 6% higher value. However, if the money you would have used for closing costs can be put into savings that yield a decent return, then after the mortgage period is up, you’ll most likely be ahead!
During the Mortgage Period
The way a typical 30-year mortgage works is that in the first half of the mortgage, the vast majority of the mortgage is interest. It may take over 20 years before you own as much of your house as the bank does! One way to speed up the percentage of the house that you actually own is to pay down the principal. Consider it an investment, but rather than investing in stocks, for example, you are investing in your house.
Keep these basic strategies in mind, and you are much more likely to get a mortgage that fits your unique situation, rather than something you are unhappy with.
10 Reasons your Loan Application May be Rejected
1. Applying for too much money.
If you are in denial about what you can really afford, your loan application might be rejected in mere seconds. Instead, let the lender decide what you can afford to borrow and then decide what you can afford to pay each month. When looking to buy a house, you should get pre-approved with a carved-in-stone pre-approval that guarantees a loan amount, interest rate and other loan terms.
2. Bad preparation.
Get all your ducks in a row before applying for a loan. You will need an avalanche of documents, so get as many as you can ready to go. Include pay stubs, investment statements, tax returns, current and past addresses and bank statements.
3. Lack of understanding.
Many loan applicants will need loan programs and terms explained. Your lender can help you understand the array of loan terms you may not be familiar with. This will help you become savvier about and involved in the process.
4. Lack of understanding, part II.
Understanding loan jargon is the first step. You will also need a working knowledge of what happens during processing, underwriting and closing. This is crucial to making sure that everything goes your way and goes smoothly. You also need to understand time frames, responsibilities of all parties and documentation needs. Make sure you get a Good Faith Estimate of your closing costs to ensure you understand what you will need to pay. This is also a good reference to use to gauge if everything is as it should be.
5. Third-party problems.
Unfortunately, the multiple parties who will need to coordinate your loan may not always be in sync. Although credit reports and appraisals are typically on time, investment reports, tax returns and home inspections may require extra effort on your part to meet deadlines.
Although being self-employed is not a problem in itself, you will need more documentation to apply for a loan. If you work at home, are paid on commission only or own 25 percent or more of a business, you are self-employed. You will need to show past years’ tax returns as proof of income and communicate your employment status before initiating the lending process.
7. Property repair problems.
If you have a government loan on a home in need of repair, you will need to come with instructions explaining who will be responsible for repairs and when the repairs will occur. You can ask your lender for assistance on this.
8. Unexplained credit problems.
One of the most important things to do before applying for a loan is to check your credit report. You will need to check for any errors that can be corrected, problems you need to explain or delinquencies you can clean up.
9. Unverified closing funds.
If you need to pay a sum at closing, such as a down payment, you may need to show bank statements or other financial documents proving you have the funds, showing how long they have been in place, etc.
10. Poor communication.
There are many parties involved in any real estate transaction, including the buyer, seller, real estate agents, lender, home inspectors, attorneys and possibly many more. Each person must have a good understanding of what is going on during the process. A good lender or real estate agent is crucial to making sure everything goes well. Bad communication can mean that the deal falls apart.