Home Buying Power

by Marti Kilby

  Copyright © 2018 by Marti Kilby

  All rights reserved. No part of this book may be reproduced or used in any manner without the written permission of the copyright holder except for the use of quotations in a book review.

  This book is dedicated to all of the buyers who have trusted me to help them buy a place to call home. All of their experiences, the great and not-so-great, form the foundation for this book.

  And a special thanks to my insanely talented husband, Ronn, who has tirelessly supported me in my real estate career. Whether I needed a logo design, a book cover, or cutting-edge video tours, he has been there for me every step of the way.

  Table of Contents

  Introduction

  Chapter 1:

  Are You Ready to Buy a Home?

  Chapter 2:

  Getting Your Ducks in a Row

  Chapter 3:

  Loan Pre-Approval: Time to Get Real

  Chapter 4:

  Finding the Loan That’s Right for You

  Chapter 5:

  The Cost of Buying:

  Where to Find Down Payment Help

  Chapter 6:

  Your Secret Weapon: A Killer Agent

  Chapter 7:

  Let the House-Hunting Fun Begin!

  Chapter 8:

  Dream Home or Nightmare?

  The Pros and Cons of Buying a Short Sale or Foreclosure

  Chapter 9:

  How to Make an Offer They Can’t Refuse

  Chapter 10:

  Negotiation: How to Turn an Offer into a Deal

  Chapter 11:

  Who Pays for What When Buying a Home?

  Chapter 12:

  All about Escrow and Why It’s Important

  Chapter 13:

  The Truth about Title Insurance

  Chapter 14:

  Home Inspection and Repairs:

  What Should a Buyer Expect?

  Chapter 15:

  Uh-Oh! A Word about Real Estate Disclosures

  Chapter 16:

  When the Appraisal Brings a Surprise

  Chapter 17:

  What Insurance Do You Really Need

  When Purchasing a Home?

  Chapter 18:

  When You Should and Shouldn’t

  Purchase a Home Warranty

  Chapter 19:

  Just Sign Here: Understanding Your Loan Documents

  Chapter 20:

  Countdown to Closing

  Chapter 21:

  Happily Ever After:

  Keeping the Romance with Your Home Alive

  Final Thoughts

  Glossary

  Appendix House-Hunting Checklist

  Know Your Fair Housing Rights as a Buyer

  Bibliography

  What People Are Saying

  About the Author

  Introduction

  Buying a home is probably the single largest purchase most people will make in their lifetime. It is a complicated process, and, unfortunately, we all know someone who’s suffered from buyer’s remorse. Maybe the home didn’t really fit their needs, or the location was far from ideal. Perhaps they overpaid, or they bought a lemon that rapidly became a money pit. Whatever the story, the potential for costly and emotionally upsetting problems is what makes home buying so scary for many people.

  That’s about to change. This book will make you a savvy shopper; one who’s less likely to purchase the wrong home and more likely to get the best possible deal for their money. I will take you step by step through the complete home-buying process—from determining if you are ready to buy; to financing, inspections, and negotiating; and finally to closing escrow and enjoying your new home. The book is written in chronological order, breaking the process down into chapters and identifying tips along the way that will save you money and improve your odds of getting the home you want. Of course, markets will vary according to local economies, but whether you’re in a seller’s or buyer’s market, there are steps you can take to improve your bargaining position.

  As a real estate broker and REALTOR®—and as the owner of a real estate company in San Diego County—I have helped countless buyers find and purchase the home that’s right for them. It all comes down to gaining a better understanding of the process at each step, identifying your own needs versus wants, and learning some money-saving tips. As I operate in San Diego County, the items I discuss in this book are based on California law and practices, but all of the principles are generally applicable throughout the US.

  At the end of the book, I’ve included a Glossary, but there are a few terms pertaining to real estate professionals that should be clarified up front. Every state requires that a person representing others in the buying or selling of real estate be licensed by the state in which they do business. Real estate brokers are licensed to act on their own—having met extensive educational requirements and passed a comprehensive exam—while licensed real estate agents or salespersons also must meet educational requirements and pass an exam, but they must act under the supervision of a broker. I also want to clarify the difference between a REALTOR and a real estate agent. A REALTOR is a member of the National Association of REALTORS (NAR), a trade organization devoted to supporting professionalism and ethics throughout the real estate industry. Each state also has an affiliated Association of REALTORS, as do most large cities. Not all agents, salespersons, or brokers are REALTORS, but in many parts of the country, NAR membership is regarded as a sign of commitment to the highest levels of professionalism. Although I use the term real estate agent to refer to the profession in general, I have written this guide with the standards of the National Association of REALTORS in mind. That being said, I hope that agents throughout the country will see this book as a helpful guide to share with their buyers. I have tremendous respect for my fellow professionals, and I hope they find value in the information I’ve assembled.

  Ultimately, my goal in writing this book, however, is to save you—the home buyer—heartache and money. I want you to feel confident when you write an offer or agree to a counteroffer that you’re making a good deal backed by solid information. I promise that if you put the information in this book to work, your home-buying experience will be an exciting, fulfilling life event—not a financial disaster or confusing nightmare. Whether you’re a first-time buyer or you’ve bought and sold several homes, I know this book will show you ways to improve the home-buying experience, making it more successful and less stressful.

  Join me now and become a savvy home buying shopper!

  Chapter 1

  Are You Ready to Buy a Home?

  I purchased my first home back in 1977 in Mission Viejo, CA. My first husband and I were in our mid-20s, and I remember very little about the process except that my mom loaned us the down payment, and we signed a whole stack of papers that I really didn’t understand. I don’t even think we negotiated the sales price, and I know we definitely didn’t shop for a loan. We basically just followed what our agent told us to do. Luckily for us, our agent was trustworthy and the market was in an upswing. When we sold three years later, we more than doubled our money, but we could have just as easily lost it due to our ignorance.

  While buying a home is a lifelong dream for many, it’s also a complicated process that comes with considerable responsibility. In this chapter, I’ll be taking you through the pros and cons of homeownership to help you determine if buying a home is right for you at this point in your life. But before we dive in, let’s look at a typical example:

  Ashley and Todd just made the last payment on their current 12-month lease for the condo they’ve been renting here in San Diego for the past two years. Their landlord calls to let them know that when they renew the lease, the monthly payment will be going up by $200! They certainly
didn’t see that coming!

  So now they’re seriously considering buying a home, but they’re getting all kinds of advice from friends and family that’s only making the decision more confusing. Do they have enough money saved? What if one of them loses their job? What if they buy a lemon that becomes a money pit?

  There are many legitimate concerns about buying a home. It is the single largest purchase most people will make in their lifetime. And, obviously, there are some things that happen in life that can’t be anticipated. To help take the guesswork out of it, I’ve put together some of the pros and cons of homeownership and a list of 12 statements you’ll want to consider before making the move.

  Pros

  Stability. One of the biggest drawbacks to renting is the uncertainty of not knowing how long you will be able to stay in one location. When you rent, where you live and for how long is at the whim of your landlord or property manager. When you own your own single-family home or condo, so long as you pay your mortgage, it is unlikely that any outside party can force you to move.

  Predictable payments. If you purchase a home with a fixed-rate mortgage, your monthly payment will not change, whereas monthly rents can change annually or even monthly, depending on your contract. Knowing that your housing expense is fixed makes it much easier to plan for other purchases, such as vacations and cars.

  Mortgage interest and property taxes paid are tax deductible. These added deductions can represent a significant tax savings that you don’t have if paying rent.

  Building equity. With the economy back on more stable ground, we have seen significant appreciation in property values over the past few years. Although the pace has slowed a bit, home values are still increasing, which means that as values increase, and as you pay down your principal, you are creating equity that you can tap into for college, retirement, or for buying a step-up home in the future.

  This is a strong argument for homeownership. Right now, the average rent in San Diego County for a decent two-bedroom condo is around $1650. That is $19,800 a year, and in just five years, that adds up to $99,000! Nearly $100,000 and nothing to show for it.

  Investment opportunity. Depending on the price and monthly expenses, it might be that the first home you buy can later be rented out, allowing you to derive rental income. Now you’re the landlord! Many first-time buyers often purchase a more modest first home with this strategy in mind.

  Putting down roots. One of the less obvious benefits of homeownership is people often feel more connected to a community when they own a home in a specific area, and they’re more likely to participate or volunteer in local activities or groups.

  Decorate as you desire. Another drawback to renting is the lack of freedom to make your own decorating decisions when it comes to paint, wallpaper, or even updating faucets and light fixtures. When you own your home, you can let the DIY decorator in you run free!

  Cons

  It takes money. Lots of money. While there are some loan programs (VA and some credit unions) that require zero down, generally you need at least 3.5% of the purchase price as a down payment for an FHA loan. Conventional loans require 5–20%. That is a lot of money for many people to save.

  There are some down payment assistance programs available, and often a seller will help with closing costs. Alternately, buyers often borrow from their retirement accounts or get gift funds from a family member. If you decide to buy, obtaining a pre-approval for a loan will be your first step before looking at homes! Knowing what you can honestly afford will save you disappointment down the road. I’ll have more on the pre-approval process in Chapter 3.

  You might have to give up some things. Let’s say you want to buy a home for $425,000 with an FHA loan. You put down $14,875. With your upfront mortgage insurance premium written into the loan, your loan amount is $417,302. Your monthly payment—including principal, interest, mortgage insurance, taxes, and homeowner’s insurance—will be roughly $2,946.00. Depending on where you are purchasing, a single-family home priced at $425,000 might not have a remodeled kitchen or bathrooms, and it is likely you will have to make some cuts in other expenditures, such as entertainment, in order to afford the home.

  If it breaks, you fix it. The nice part about renting is that if the water heater bursts, not only is the owner responsible for replacing or repairing it, but they also have to clean up any mess or damage. You own it, you fix it. This can come as quite a shock to new homeowners, and it is recommended that you have some funds in reserve to cope with unexpected repairs or appliances that need to be replaced. The amount of reserves will vary, but lenders often recommend that homeowners have six months PITI (Principal, Interest, Taxes, and Insurance) saved to cover unexpected repairs or loss of income. Not everything is covered by insurance or home warranties.

  Ongoing maintenance. Owning a home or condo has varying levels of maintenance that must be taken care of in order to protect your investment. If you have a single-family home with a yard, you will have regular maintenance, or you’ll need to hire a gardener. There will also be numerous other ongoing projects, like cleaning the rain gutters or pest control. On the other hand, if you purchase a condo, expect to pay an average of $280-$400 a month in homeowners’ association (HOA) fees to cover maintenance for the complex.

  What to Consider

  Here are some statements to consider that will help you determine if you are ready to be a homeowner, and if so, whether you would be more comfortable in a condo or single-family home.

  I like where I live and haven’t given much thought to buying.

  I really enjoy having a swimming pool and gym where I live.

  I have a steady job and have managed to save some money.

  I hate the idea of paying rent and having nothing to show for it.

  I like the idea of moving from city to city to see more of the country.

  I pay a lot in taxes and would like to have some additional deductions.

  I consider myself handy and enjoy getting my hands dirty.

  I don’t spend much time at home on evenings or weekends.

  I’d like to have a place for my kids and/or dog to play outdoors.

  I honestly don’t get bored watching HGTV or DIY Channel.

  I’m okay with cutting back on dinners out and entertainment to pay a mortgage.

  I like knowing that I don’t have to move unless I want to.

  Savvy Shopper Tips: Don’t buy unless you’re ready, and make sure you purchase the type of property best suited for who you are and how you like to live—it’s a big commitment.

  If you’re tired of moving and looking for some stability, and if you have a steady, reliable income, you might be ready to buy—at least psychologically. If you’re handy, enjoy DIY projects, and want some outdoor space, a single-family home might be your best buy. On the other hand, if you like amenities, such as a pool and fitness room, and are not interested in the responsibility of ongoing maintenance, a condo would probably be more suitable. If you don’t mind moving every couple of years and would rather spend your money on travel and/or entertainment or cars, you’re probably not a good candidate for buying at this time.

  Ready to buy? Let’s take the next step!

  Chapter 2

  Getting Your Ducks in a Row

  Whether you’re shopping for your first home or your third, contrary to what you might see on TV, the home buying process does not begin with your real estate agent showing you a home you can’t afford. It actually should begin as much as a year in advance with a careful evaluation of your credit.

  My friends Ashley and Todd, who we met in Chapter 1, made the decision that they were ready to buy. So they went to the bank where they both had accounts and started the application process. The loan officer ran both of their credit reports but discovered a problem. Apparently, several years earlier while still in college, Todd had run up some serious credit card debt and defaulted on two cards that were now showing as collection accounts, along with three delinquent parking tick
ets. Todd had managed to maintain another credit card and a car loan, so he hadn’t really thought about these black marks as being significant until now. The loan officer explained that these derogatory items would have to be removed before Todd could be on the loan. Disappointed, they realized they would probably have to continue to rent until Todd’s credit issues were resolved.

  In order to purchase a home, most people need a home loan. There are several different types of loans offered by banks, credit unions, and mortgage bankers. The type of loan you can get and the interest rate you will be charged is largely determined by your credit score, which is affected by a number of factors, including your payment history, the length of time you’ve had credit, derogatory items, and the level of debt you carry in relation to credit limits.

  When evaluating your credit for a mortgage pre-approval, a lender will pull what is called a tri-merge report. This is one report that shows your credit history and score according to the three primary credit bureaus: Experian, Equifax, and TransUnion. The lender will use the middle score, not the highest, among the three reports. And if there are two buyers, they will use the middle score of the lower-scoring buyer. This is why it’s important to check your credit reports from all three bureaus, not just one.

  Most people will discover some discrepancies on their reports, or items that are simply erroneous. Some of these items you can correct fairly easily by writing the bureau in question and providing written proof of your claim. But there are other issues that may be more challenging, such as accounts listed in your name that you’ve never had, or collection accounts or late payments that were actually paid on time. In some situations, it may be helpful to consult with a reputable credit repair agency to see what you can fix, what you may need to just wait out, or what they can do to help. The credit repair process can take as much as a year, but it will be well worth it if you are able to improve your score and get a more favorable rate for your mortgage.