6 Myths About Homebuying — Translated

I came across an interesting article on Yahoo about “Homebuying Myths” (click here to see the article).  The article has some interesting information, but there are some things that I think could be added to make the article more helpful.  Here is what I would add —

Myth 1 – You don’t need a 20% down payment to buy a home.

This is true.  In fact, most of my clients do not put down 20% of the purchase price when they buy a home.  FHA insured loans require only a 3.5% downpayment, and there are other loan products that require as little as 5% down.  However, when you borrow more than 80% of the purchase price, your lender will require that you pay for mortgage insurance.  The details vary, but I generally see payments in the neighborhood of $100 per month paid for about the first 10 years of the loan.  This is in addition to principal, interest and escrow items.  Although this should not necessarily deter you from buying a home, it is worth taking into consideration when determining how much to put down up front.

Myth 2 – Your credit score is good enough.

Another fair point.  I would add that one easy way to increase your credit score is to ask your credit card companies for a credit limit increase.  You may even be able to do it in a few minutes online.  By increasing your available credit, you reduce your credit usage as a percentage of the available credit.  This, in turn, should increase your credit score.  Just don’t go and use all that new credit!

Myth 3 – Loan pre-approval determines your price range.

This is an excellent point.  Lenders make money based on how much you borrow.  They don’t care that you won’t be able to take a vacation for the next 5 years, because your mortgage payment has you tapped out every month.  Reality check that monthly payment before you start looking at that 4 bedroom McMansion.

Myth 4 – Once I make the offer, the hard work is done.

I may be off base, but I don’t think people really believe this.  But if you were under that misconception, just know that the contract is only the beginning of a long process.  One great way to make the process easier is to have a great attorney at your side to guide you (Hint hint!).

Myth 5 – Your home purchase is non-negotiable.

Well, duh!  But let’s put this one in proper perspective.  Yes, everything is negotiable.  However, sellers aren’t dumb.  When you ask for closing costs to be paid, in the seller’s mind, it’s a deduction from the price offered.  There’s no free money, so the Seller will take that into account when they counter.  Some people will gross up the price in order to include a closing cost credit.  This is fine, but it is important to understand that you are really just wrapping the closing costs into the amount borrowed and paying interest on it over 30 years.  While that may work for you if you don’t have a lot of cash in your pocket to bring to closing, you’ll save interest in the long run by paying the costs up front.  Closing costs are a fact of life when you buy real estate.  The better strategy is to make sure your lender isn’t gouging you on their closing costs, regardless of who is paying them.

Myth 6 – You bought the perfect home.

Of course, there is no such thing as perfect.  The best way to prevent regret is to do try to avoid a case of “oneitis” once you zero in on a home to buy.  Believe me that there is always another property out there for you.  If you keep that in the back of your mind, it will be easier to make the decision cut loose from a home that is increasingly looking like a lemon.

What do you think?  Anything else to add?

As always, please do not hesitate to contact me at 773-632-8330 or patrick@loftus-law.com.  And finally, as always, I am honored by your referrals.  To learn more about my practice, please contact me!  And if you are looking to buy or sell property, I would love to set you up with one of my fantastic real estate brokers.

Closing Costs Part 4 – Miscellaneous Charges

In the first three installments of my series on closing costs, I addressed real estate tax credits, title charges and lender costs.  This fourth, and final, last installment will address the last category of closing costs – everything else.  As you review your closing costs with your attorney at the closing table, it may feel like everyone is taking their pound of flesh from the transaction.  That is because it is essentially true.

Transfer Taxes

Whenever you buy or sell real estate, the government sticks its hand in your pocket.  The amount of the tax depends largely upon the location of the parcel.  The State of Illinois always gets $1 per $1,000 of the purchase price and the county gets half of that.  Municipalities have the authority to set their own individual taxes.  Some have none at all (eg. Palatine), and some are fairly hefty (eg. Chicago – $7.50 per $1,000 of the purchase price for the buyer and $3.00 per $1,000 of the purchase price for the seller!).  Unfortunately, in most instances these taxes are unavoidable.

Real Estate Broker Commissions

The brokers are paid from the Seller proceeds.  The amount they are paid is determined by the terms the listing agreement.  The brokers’ commission is usually 5% or 6% of the purchase price.  Regardless of the total commission, the listing broker gets a broker co-op commission of 2.5% of the purchase price paid by the listing broker from the total commission.

Recording Fees

The title company will record the deed and mortgage at the county recorder’s office to let the whole world know that you now own the property (and a mortgage on said property).  Of course, the buyer is expected to pay the recorder’s for this.  The cost is usually between $120 and $130 total.

Survey

If the property is a single-family, detached residence, the seller is required to provide the buyer and title company with a survey.  The cost of a survey is roughly $450.  If the property is a condominium, no survey is necessary.

Attorney Fee

Obviously, this is the most important cost of all!  It is crucial to have a good attorney (like me) to protect you when hundreds of thousands of dollars are at stake.  Attorneys, such as myself, who handle residential real estate transactions charge a flat fee paid at closing.  At the time of publication, LoftusLaw charges $500.  What a bargain!

Thus concludes my series on closing costs.  Your experience may vary, as each transaction is unique.  If you have questions about closing costs, or any other real estate matter, as always, you can contact me at patrick@loftus-law.com or 773-632-8330.  To see what my clients have to say about me, please visit me at avvo.com or on my Google + page.

New IHDA Program Offers Up To $50,000 In Assistance To Under Water Homeowners

The painful memories of the housing bubble are quickly fading amidst the red-hot real estate market here in the Chicago area.  However, the good news is not universal.  Some homeowners live in sort of a limbo where they can just afford their mortgage payment, but they cannot possibly sell their home due to the fact that they owe more than the property is worth.

There may be hope for some of you.  The Illinois Housing Development Authority (IHDA) has introduced a program for qualifying homeowners to receive up to $50,0o0 toward the balance due on their mortgage and refinance into a more affordable loan based on the market value of their home.  The following eligibility requirements must be met:

  • Current on your mortgage for at least 12 months
  • Live in the home as your primary residence
  • Credit qualify for a new IHDA mortgage through a participating lender
  • Be within IHDA’s income and home price limits 
  • Credit score must be at or above 640
    • 640 for Conventional, VA and USDA
    • 660 for FHA
  • Pre-assistance combined loan-to-value must be greater than 110%
  • Post-assistance loan-to-value will be 90-97%

The income and home price limits for the Chicago area vary depending on the number of people in your household and whether your home is new construction, existing or multi-unit.

If you qualify, I would strongly encourage you to reach out to one of the participating lenders.  Free money, after all!

If you have questions about this program, or any other real estate matter, as always, you can contact me at patrick@loftus-law.com or 773-632-8330.  To see what my clients have to say about me, please visit me at avvo.com or on my Google + page.

Closing Costs Part 3 – Lender Charges

The third installment of my posts on closing costs focuses on charges you may incur at closing from your lender.  The vast majority of buyers do not have the cash to plunk down a few hundred thousand dollars to buy a home.  As a result, most real estate transactions involve a loan through a mortgage broker.  Not surprisingly, lenders do not work for free, and there are a number of costs you can expect to incur in connection with borrowing their money.

Unlike title charges and real estate tax credits, lender charges vary quite a bit depending on the lender and loan product you choose.  However, there are some charges and costs that you can generally expect to see on the closing statement.

Origination Fee

Lenders often charge an origination fee for a new loan.  Ostensibly, this is the charge for the work necessary to vet you as a borrower and process the loan.  This charge is typically in the range of $1,000, although it varies from lender to lender.

It is worth mentioning, that the lender is making much more than just the origination fee in terms of profit from originating the loan.  Mortgage brokers make the bulk of their money on something called the yield spread premium.  The yield spread premium is the difference between the interest rate at which the broker can borrow money from the end lender and the interest rate at which you borrow the money from the broker.  That may sound a little unfair; however, it is important to understand that, as a borrower, you do not have access to end lenders who provide the funds.  In addition, banks the fund loans from their own money do not offer better rates than mortgage brokers.

Appraisal Fee

Whenever you borrow money to be secured as collateral for repayment of the loan, the lender wants to know that the collateral has enough value to repay the lender if you cannot.  Fair enough.  As such, part of the loan process involves having an appraiser determine the value of the property.  Typically, this costs somewhere between $300 and $500.

Miscellanous Fees

There are several fees you may see on the settlement statement of a relatively small amount, which I typically characterize as “junk” fees.  For example, there may be a credit certification fee ($10-$100).  This is the fee from the service used by the lender to obtain transcripts of your tax returns from the IRS.  Sometimes you will see a flood certification fee (usually around $10).  The lender wants to see whether the property is in a FEMA flood zone, and determine whether to make you pay for flood insurance.  You may also see a fee for obtaining your credit report (between $10 and $50).

Prepaid Interest

When you make a mortgage payment, you pay interest for the preceding month.  As a new borrower, your first mortgage payment will not be due until the beginning of the second full month after the closing date.  This leaves interest for the month of closing unaccounted for in the loan payments.  Since interest accrues daily, it is customary to pay the interest for the remaining day in the month of closing at closing.  This is not exactly a loan charge, but it is something you will need to pay at closing.  The amount varies depending on the amount you borrow, the interest rate and the time of the month you close.

Impounds

In most cases, the lender will set up an escrow account for the borrower to handle payment of property taxes and insurance.  Every month, the borrower pays some money into the escrow, and when the bills are issued, they are paid from the funds in escrow.  At closing the borrower puts some money into the escrow to get it started.  As with prepaid interest, it is not a charge, insomuch as the money still belongs to the borrower and will be used to pay the borrower’s property tax and insurance bills.  The amount that goes into the escrow varies depending on the amount of the annual tax and insurance bills and the time of year the closing occurs.

As mentioned above, the lender costs can vary quite a bit depending on the lender and loan product.  Do not necessarily be concerned if your settlement statement has additional costs or is missing some of these charges.  What you should do to make sure you are not taken to the cleaners is to hire a good real estate attorney, like me, to make sure the charges are accurate!

If you have questions about real estate closings, or any other real estate matter, as always, you can contact me at patrick@loftus-law.com or 773-632-8330.  To see what my clients have to say about me, please visit me at avvo.com or on my Google + page.