Buying a house is a purchase unlike any other. It’s not just because there are so many laws, forms and documents surrounding the purchase, but because what you buy, how you pay for it and what you do with it has so many far-reaching implications for your financial future.
If you’re considering buying for the first time or just looking to hone your skills as a real estate tycoon, stop by the free seminar The Expert’s Guide to First-Time Homebuying, Home Equity and Investment Properties. Hosted at the Lafayette Federal Headquarters in Rockville, MD on Saturday, September 16 from 9 am – 12 pm, the session will feature industry experts’ best advice for prospective buyers.
Even if you can’t make it to Rockville you can always watch the session via livestream at facebook.com/LafayetteFederalCreditUnion! Can’t wait to glean gems of wisdom? Here are a few hints about frequently misunderstood aspects of home buying to get you started.
1. Prequalification does not equal pre-approval
When you get prequalified for a loan, a lender takes a quick look at your financial situation based on your income, debt and assets that you submitted on your application, then tells you the mortgage amount you would most likely qualify for. While you might receive a letter called a “Pre-Approval” the language in the letter tells your real estate agent and the sellers that additional verification is still required in order for you to get the loan.
To get a binding preapproval letter, you have to complete an official application and provide documentation related to your income and assets so the lender can perform an extensive examination of your financial background. They’ll also pull your credit rating. Once complete, the pre-approval letter will tell you the exact mortgage amount for which you qualify. In some cases, it’s a conditional commitment and having this does let sellers that you’re serious. A true pre-approval letter is an actual commitment to the loan that identifies the loan file has been reviewed and approved by the loan underwriter. This means the only condition to the loan is finding a property that will be approved. This is the strongest type of pre-approval letter you can get as it lets the real estate agent and the sellers know that the borrower is actually approved for the loan and gives you the greatest negotiating power when a seller is receiving multiple offers on their home. Being pre-approved BEFORE you go shopping for a home is the best way to help differentiate you from other buyers in a competitive market.
2. What are closing costs?
The last step in the homebuying process, closing is a little confusing for buyers.
There are three kinds of costs associated with closing: lender fees, prepaid expenses like taxes and insurance on the property, and settlement costs. These costs can differ depending on the loan product, the lender and the title company you choose. Lafayette Federal Credit Union provides a complete list of the closing costs associated with each loan type and gives you a detail based on each scenario you request. To obtain a detailed list, go to lfcu.mortgagewebcenter.com and enter your loan scenario under “Quick Quote”.
The seller might pay some of the fees, while others might be discounted if you’re a first-time homebuyer. Your lender might also agree to finance some or even all of your closing costs so that rather than paying them upfront in cash, you can pay them out over time.
Situations will vary so don’t be afraid to ask questions and at the end of the day, know that closing costs typically cost the buyer between three and ten percent of the value of your total mortgage loan. There are also some restrictions based on loan product so you’ll need to be aware of those as well. Most importantly, compare lenders! There are various options available for lowering how much money you have to come to settlement with so the more you understand the better off you’ll be.
3. Who pays the real estate agents?
Typically, the commission that the listing (seller’s) agent receives is paid by the seller in that it’s taken out of the total amount you, the buyer, pays for the home. So if you’re purchasing a $300,000 home, the listing agent’s commission comes out of that amount, and then the selling agent splits the commission with your buyer’s agent. This is only the most standard set up though and rates are negotiable. If you come to the seminar, you can learn about how commission work for short sales, dual agents and other situations.
4. Estimates vs. valuations vs. appraisals
How much is a home worth? Different parties involved in the buying process will come up with different numbers, and they can be confusing.
- Market valuation – an estimate of the amount a home will sell for in its current state within a reasonable amount of time – typically 90 days
- Appraised value – the amount an appraiser values the home at, the lender will use this amount to determine how much money can be borrowed and under what terms
- Assessed value – the worth of the home as determined by a tax assessor, which is then used to calculate property tax
5. Do I own the land when I buy a home?
Though some commercial properties are built on leased land, in the United States non-mobile residential properties are generally conveyed along with the land they’re on. These are called freehold properties.
In other countries and some states like Hawaii, Florida and New York, you can also find leasehold properties. For these, after the lease expires you must give back the land as well as any structure on it. This usually isn’t a concern for homebuyers in the U.S. because freehold properties are so much more common, but it’s worth looking out for if you’re looking to buy in one of the states mentioned above.
Still have questions or concerns? Come to Lafayette Federal Credit Union’s free seminar, The Expert’s Guide to First-Time Homebuying, Home Equity and Investment Properties, on September 16 to get answers from the experts. To learn more and save your seat, visit eventbrite.com/e/experts-guide.