Pre-Listing Inspections

Imagine what happens when there is not a pre-listing inspection.  The buyer contracts for the home with a provision for professional home inspection.  When it is made, there could be things that the buyer didn't expect or even, anticipate.  If it doesn't trigger an action to terminate the contract, the buyer will inevitably, ask the seller to make all the repairs.

When presented with the buyer's request, the seller may take the opposite position of not wanting to do any of the repairs.  The buyer could accept the property in its "as is" condition or negotiate the repairs or a reduced price with the seller.

Any experienced agent can tell you that sometimes a mutually agreed negotiation is reached and other times, an impasse is met that cannot be resolved.  The contract is terminated, and the house has to go back on the market but this time, a disclosure has to be made to all parties looking at the home which may deter showings.

Taking a pro-active approach, by obtaining a pre-listing inspection, the seller can find out about things that will probably show up in a buyer's inspection.  They can get them repaired before the home is shown and it will help the buyer feel more confident with the home.  Another option would be to disclose them as not working and make a price adjustment, either way, the seller is in control and is taking a position of transparency with potential buyers.

In some cases, the pre-listing inspection may show things in working order that the buyer's inspection indicates as needing repair.  With two disinterested parties having opposing opinions, negotiations have a more likely chance for a mutual agreement.

Disclosing things that are not in working order can reduce liability in the future.  Some deficiencies with the home are not discovered prior to the closing and the surprise issues could lead to liability.  The pre-listing inspection by a professional combined with the seller disclosing it properly can reduce potential liability.

For the small investment in the pre-listing inspection, the benefits are well worth the expense.  You and potential buyers will have a better idea of the condition of your property and know what to expect.  You can present the property in a transparent way that will build confidence with the buyer.  You'll avoid unpleasant surprises as well as possible delays.  Pre-listing inspections can lead to faster sales and satisfaction for everyone involved.

For more information, download the Sellers Guide.

Would you move if it was to your advantage?

A much-repeated investment strategy is to buy low and sell high.  Some people who purchased around the financial crisis of 2010-2012 are poised to make considerable profits.

The median home price in America is now $295,300 up from $155,600 in February 2012 which calculates close to an 8% annual increase.  The median equity that homeowners have earned during the same period is $140,000.

Inventory is in short supply while demand is high which has caused prices to increase.  Factors that continue to contribute to the lower number of homes on the market are record low mortgage rates and housing starts have not met expectations since the Great Recession.  This year, people spending more time at home due to the pandemic has caused some people to rethink their current living space which has added to the demand.

Some experts believe that a significant portion of the workforce will continue to work from home after the pandemic has passed making the motivation for a larger home more of a long-term effect.

The median days on the market for a listing is 24 which is a direct result of the low inventory and heightened competition.  Sold homes are receiving an average of three offers with some situations ending in a bidding war.  This is an advantage for a seller who can not only realize a higher sales price but also accelerate a move into another home.

While the pandemic has certainly wreaked havoc on some businesses like the hospitality industry, real estate has continued to boom. Seven out of ten sales contracts are closing on-time which can give sellers a great deal of confidence.

Taxpayers can exclude up to $500,000 of qualified gain if they are married and up to $250,000 if single.  Some homeowners are taking the profit from their homes while at the top of the market, reserving part of their equity for investments, and purchasing another home with a higher loan-to-value mortgage at the incredibly low mortgage rates now available.

If you're curious to see if this might work for you, contact us at (973) 251-0100 to find out what your home is worth now and what homes are available that may fit your lifestyle better.  Download our Sellers Guide.

Debt-to-Income Ratio Affects Approval & the Interest Rate

Debt-to-Income ratio is a tool that lenders use to qualify buyers for a mortgage and is an important factor in determining loan approval.  It provides an indication of the amount of debt that a potential borrower is obligated to in relation to how much income they have.

Total monthly debts are determined by adding the normal and recurring monthly debt payments such as monthly housing costs, car payments, minimum credit card payments, personal loan payments, student loans, child support, alimony, and other things.

By dividing the monthly income into the monthly debt, you arrive at a percentage of the monthly income.  Lenders actually look at two different ratios commonly called the front-end and the back-end.

The front-end ratio is the proposed total house payment including principal, interest, taxes, insurance, mortgage insurance if required, and homeowner association fees.  Lenders generally don't want these expenses to be more than 28% of the monthly gross income. 

The back-end ratio includes the same items that are in the front-end ratio plus any other monthly obligations like the ones mentioned earlier.  Lenders prefer to see this ratio not to exceed 36% of monthly gross income but some lenders may extend that to 43%.  Borrowers obtaining an FHA mortgage might also be allowed an even higher back-end ratio.

If a borrower had $8,000 monthly gross income, their proposed house payment should not exceed $2,240 or 28% of their monthly gross income.  Then, their house payment and monthly debt should ideally not exceed $2,880 or 36% of their monthly gross income. 

For the sake of an example, let's say that their monthly debt was $900.  That would only leave $1,980 for the maximum house payment.  The monthly debt became a limiting factor affecting the house payment.

In addition to determining whether the buyer qualifies for the mortgage, it could affect the interest rate.  Having good credit and having the proper ratios can result in being approved for a mortgage.  On the other hand, if the debt is on the upper side of an acceptable range, the lender may charge a higher interest rate for the addition risk of a marginal borrower.

While the math is not difficult to come up with your ratios, it is not necessarily a do-it-yourself project.  A trusted lending professional can assess your situation and give you an accurate picture of what price home you can afford and the rate you can expect to pay.

Both things are important to know before you start looking at homes and especially before you contract for one.  All lenders are not the same.  Call me to get a recommendation of a trusted mortgage professional who specializes in the type of mortgage you want. Download this FREE Buyers Guide. 

Buyer's Closing Costs

Ideally, each party will pay their own closing costs associated with the purchase and the sale of a home, but they can be negotiable based on lender requirements and market conditions.

The fees are usually paid at the settlement and will be itemized on the closing statement.  Buyers should be aware of them before contracting for a home.  If a mortgage is involved, the lender will want to verify that the borrower has ample funds available at closing to pay for them.

Buyer's closing costs can range between two to five percent of the sales price.  The real estate agents should be able to give you an estimate of what a buyer can expect.  The most accurate estimate will come from the lender at the time the loan application is made. They may or may not include other fees that will be charged to buyers by the title or escrow company.

Buyers are required to be provided a standard Closing Disclosure form at least three business days before the loan closing date.  This document will include the loan terms, estimated monthly payments, loan fees and other charges.  This can be compared to the loan estimate provided by the lender when the application was made.

Fees connected to a mortgage

Loan origination fee ... This is the lender's fee for processing the mortgage application.  It can vary in amount but typically, it can be one percent of the mortgage amount.  It may be possible to negotiate this fee into the rate of the mortgage.

VA funding fee ... This is a fee charged to the veteran for closing the loan.  It can be paid in cash or rolled into mortgage.  The amount is based on the status of the veteran, their down payment and whether they have had a VA loan before.

Appraisal ... This is a fee paid for a licensed appraiser to determine the value of the property.  It validates that the mortgage will not exceed the purchase price and that the buyer has enough down payment based on the type of mortgage applied for.

Attorney fee ... This fee is charged to ensure that the legal documents are drawn properly so the lender will have an enforceable mortgage.  It is not for legal representation of the buyer.

Discount points ... A point is one percent of the mortgage.  These fees are considered prepaid interest and can be used to adjust the interest rate on the mortgage.

Lender's title insurance ... This coverage insures that the lender has an enforceable lien from title claims on the property.  This policy is usually issued in connection with an owner's title policy and is priced separately.

Mortgage insurance ... Most loans made in excess of 80% of loan to value require mortgage insurance to protect the lender from loss if the property must be foreclosed on.  There is no mortgage insurance requirement on VA loans. FHA mortgage insurance premium has two parts.  There is an up-front charge of 1.75% of loan amount and then, a monthly amount which is added to the payment.  Conventional loans usually collect the first month's premium in advance and subsequent amounts are rolled into the mortgage payment.

Recording fees ... These are fees that are for filing the legal documents with the municipal or county recorders.  The documents would include the mortgage and the deed.

Survey fees ... This fee is necessary, based on requirements of the lender, to verify property lines, shared fences and driveways and to identify any other encumbrances.

Underwriting fee ... This is a separate fee that covers the research and determination that the entire loan package meets the lender's requirements.

Fees required by mortgage for escrow account

Property taxes ... Lenders can require two to three months taxes to be held in escrow so that there will be enough to pay them in full 60 to 90 days before they are due.

Property insurance ... Insurance is paid in advance and the annual premium will be due at closing.  The lender further requires one additional month's amount so that one month prior to the anniversary date, the premium can be paid for the renewal.

Flood insurance ... The lender may require flood insurance on the property based on their assessment of the location in a flood zone or proximity to a flood zone.

Fees connected to purchase of a home

Settlement fee ... This is the buyer's portion of the fee paid to the title or escrow company, or attorney who handles the closing of the sale.

HOA Fee ... Home Owner Association fees are usually paid in advance by the owner.  They are prorated at closing for the amount paid that the seller does not benefit from.

Owner's Title insurance ... This coverage insures that the buyer, the new owner, received clear and marketable title from the seller.  It will protect the new owners' interests should they be challenged.  Even though it may not be required, it is recommended.

Pest inspection ... A pest inspection by a licensed exterminator can be required by a buyer to determine if there are active termites or termite damage, dry rot or another pest infestation.

Property inspection ... A home inspection conducted by a professional can be required to determine structural integrity of the property as well as all the systems in the home.  It can include but not be limited to plumbing, electrical, roof, heating and air conditioning, appliances and other things.

Title search ... Sometimes, title companies waive this fee when an owner's title policy is issued.  It can be customary that a separate fee is charged in addition to the premium for the title insurance.

Transfer taxes ... When government taxes are required, these fees must be collected.

The Consumer Financial Protection Bureau is a U.S. government agency that makes sure banks, lenders and other financial companies treat the public fairly.  You can download a Closing Disclosure Explainer from their website.

Where Did the Assumptions Go?

Mortgage assumptions have not been a practical matter for the last 30 years because mortgage rates have been on a steady decline.  Even if the seller had a rate lower than the current rate, the new purchaser must qualify to assume the loan. 

In the case of conventional loans, the lender has the right to increase the rate to the current rate which neutralizes the reason for assuming the loan.  This change took place in the early 1980's when lenders added due on sale provisions so lower rates could not be assumed.

FHA and VA loans can be assumed at the existing rate with the provision that the purchaser qualifies for the loan.  This could be an advantage if the rate on the loan to be assumed was lower than the current mortgage rate for FHA or VA and the buyer is going to owner-occupy.  Unfortunately, investors are prohibited from assuming FHA and VA loans.

Besides the obvious advantage of a lower rate which would have a lower payment, the closing costs are lower on an assumption than originating a new loan.  Another benefit is that the loan will be further into the amortization schedule than starting a new 30-year loan which means it would be retired sooner while the equity is also growing faster.

The current rates are close to one-percent lower than they were a year ago, so, assumptions are probably not a method of financing a home purchase in the near future.  The Freddie Mac forecast expects rates to remain low, possibly at a yearly average of 3.0% in 2021. 

Mortgage rates have remained low since the Great Recession even though experts anticipated they would start trending upward.  If rates increase, especially rapidly, assumptions of FHA and VA loans could easily be a tool that buyers and real estate professional alike will be employing.  For sellers with an assumable loan at a below market rate, it could add to the value of the property as well as the marketability.

Vacation Home Sales Up 44%

Vacation home sales are up 44% year-over-year according to the National Association of REALTORS® based on sales during the July to September period.  Not only are the number of units up, but they are also selling faster than in previous years.

On a national basis, 72% of existing vacation homes closed in October were on the market for less than one month.

The increased desirability and affordability of vacation homes, according to the National Association of Realtors, seems to be influenced by the pandemic and low mortgage rates.  The ability to work from home seems to be contributing to this increase. 

Freddie Mac reports the average commitment rate for a 30-year, conventional, fixed-rate mortgage decreased to 2.83% in October compared to the aver commitment rate for all of 2019 which was 3.94%. 

There may also be a safety factor involved with these decisions to purchase vacation or second homes.  Contagious diseases flourish more in highly populated areas like big cities and suburbs. The locations of the vacation or second homes are generally in areas with less residents.

The slower pace from the city may also add to the appeal of considering second homes.  Proximity to the mountains or water, whether it be the ocean, rivers or lakes, have become a lure to people who realize that if where they work doesn't matter, they can select a place where they want to be.

Historically, Americans on the east coast left the cities during the 1793 yellow fever epidemic.  The same migration took place in the mid-19^th century during three waves of Cholera and Scarlet fever. 

Trends have yet to determine whether some of these new vacation home buyers may consider moving permanently or may reconsider the decision after the pandemic.  Currently, it does have broad-based appeal and offers a lot of flexibility to owners who can afford it.

Home Inspections

A home inspector is another key professional involved in a real estate transaction.  Many times, the sales contract will have a provision that allows the purchaser to have inspections made to discover issues that are not readily apparent or have not been disclosed by the seller.

It is important to have a qualified individual perform the inspection.  Regardless of whether a license is required, buyers should ask about the inspector's experience, training, years in business and if they are familiar with the area and type of property involved.

Membership in professional associations can indicate an inspector's commitment to education and training.  References from both customers and agents are helpful and may be more meaningful.  You are encouraged to call the references, especially, if you are concerned about any specific areas.

Errors and Omission insurance is intended to cover mistakes made during an inspection.  It would be good to find out if the inspector has this type of insurance and how mistakes are handled or if omissions are made.

Find out exactly what is included in the inspection and what will trigger the inspector to recommend that you get an opinion by a specialist.  They should be able to provide you with a sample report so you can see the detail with which the items will be explained.  Ask if items that need attention will also be documented with pictures.

Some inspectors will allow you to accompany them during the inspection.  They will be able to point out their concerns and answer any questions you may have about different things.  An inspection can take two to three hours depending on the size of the property.

Generally, there is a time allotted in the sales contract for the inspections to be made and not completing them in a timely fashion could waive your right to use the contingency.  Your real estate professional will be able to guide you through this process.