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Buyer's Expenses

03/05/15 by Candace Morton

Saving to Buy a Home? Don’t Forget to Save for These Expenses.

Saving to Buy a House? Don't Forget to Save for TheseExpenses.

Photo Credit: 401(K) 2012/Flickr.

One of the first things people think about when planning to purchase a home is how much money they will need for the down payment. But often times, they forget about the other expenses associated with buying a home.

In this article, I will address the most common and largest cash needs, such as the down payment and closing costs, but I’ll also address some of the other common costs / cash needs that you should be prepared to pay.

Down Payment

Some of the most common low down payment loans are FHA, USDA, VA, and Conventional Loans with a 3% down payment. 

In general, these programs allow for down payments ranging from 0% for USDA and VA up to 3.5% for FHA. FNMA has also recently announced a 3% down payment program for first-time home buyers, and Freddie Mac is expected to offer a similar program in the near future. Each of these has advantages and disadvantages, as well as qualifying features, and should be evaluated based on the individual borrower’s circumstances. Generally, the borrower’s first consideration should be to save for a down payment of 3% to 3.5%.

Closing Costs and Prepaid Expenses

Many borrowers contact me for a pre-qualification once they have saved 3% to 3.5% for the down payment, but haven’t given consideration to how much additional cash they will need for closing costs and “prepaid items”. While there are ways to get help from sellers, and even from the lender through an “interest rate credit”, that can cover all or most of the closing costs, it is still a good idea to prepare for the payment of some closing costs. You may find a home where the seller is not willing or able to provide any assistance with closing costs. And a lender credit may not be sufficient to cover all costs.

Most closing costs are paid at closing, however, there are some that are paid upfront.

Appraisals

While this fee is disclosed by the lender as part of closing costs, it is typically required to be paid upfront at the time the appraisal is ordered and is not part of the final fees paid at closing. In the last few years, appraisal fees have increased considerably and can range from $350 – $500. If an appraiser has to go back to the property after the initial inspection because there were items needing to be repaired, it can add an additional $100 – $200 for the re-inspection.

Surveys

In addition to the home inspection and appraisal, a boundary survey may be required. This is typically in order if there are no defined property lines or the seller is not aware the property lines.

We have seen instances in which owners of large or unique properties have been asked to pay for the fee. For properties with acreage this cost can be as high as $1,000, but on average you should expect to pay $400 – $500 for a simple boundary survey if you are questioning the borders.

Insurance Premiums and Escrows

In addition to the traditional closing costs of lender fees, title fees, government transfer taxes, etc. there are also “prepaid” items such as insurance premiums and escrows.

Many buyers do not realize that the lender will require the full annual premium for their homeowners insurance to be paid in advance. While this can usually be paid at closing, it can still be a large amount that many borrowers had not planned on saving for. If flood insurance is required, many lenders require it to be paid upfront of closing. So it is always wise to check with your Realtor before making an offer on a property to determine whether it’s in a flood zone.

We have unfortunately seen some deals fall apart after it was discovered that the property was in a flood zone or high fire zone and the cost of insurance was something the borrower had not considered.

The lender will also require that 2 – 3 additional months of taxes and homeowners insurance be collected at closing to provide adequate funds for the payment of those items when they come due the following year. These are considered escrows.

Pro-rations of HOA fees and other property assessments are also often collected at closing but usually paid for by the seller.

In addition to these items, there are additional smaller items that are often forgotten that can add up quickly.

Home Inspections

Most lenders do not require you to have a home inspection but it is strongly suggested that you obtain one. Many buyers like to have this done before they order the home appraisal to make sure there are no major issues with the home, such as leaking roofs, non-functioning heat and AC units, plumbing issues, etc. A good home inspector will provide a report of all items in the house that require any type of repair. This fee is also required to be paid upfront directly to the home inspector and can vary greatly, depending upon the location and size of the home. On average, home inspections range from $300 – $500.

Pest Inspections

Again, most lenders do not require pest inspections. VA loans do require it. Most home inspections described above do not include the pest inspection, so this must be done separately. Typically, these inspections are not expensive and range from $75 – $150 and can be paid for by the seller in most cases.

Insurance Inspections

Depending upon the age of the home, insurance companies may require certain additional inspections, such as the 3 point inspection and wind mitigation inspection. Wind mitigation inspections are on average $100 – $125 and can save on homeowner’s insurance premiums, so they are generally worth the expense.

When buying a home, many people leave the task of obtaining the homeowners insurance until late in the process. But, we recommend that it be done early on, in order to determine what type of inspections may be required and to allow enough time to insure that any issues with the home are addressed early. We have seen instances in which deficiencies noted in the home inspection that were thought to be minor precluded the home buyer from obtaining homeowner’s insurance.

Reserves

Many loans do not require the borrower to maintain additional funds as “reserves”, however there are some that do. One particular situation in which reserves are required is when the buyer is purchasing a new home, but retaining the existing home either until it can be sold at a later date or for rental purposes. Reserves are required on each additional property owned. On a conventional loan, typically they will require that six months of PITI (principal, interest taxes and insurance) be available in additional cash funds.

Earnest Money Deposit

Even if you are getting a 0% down payment loan, such as a VA or USDA home loan, the seller of the property will require some type of earnest money deposit. This depends on the value of the home, but typically a minimum of $1000 or 1% of the purchase price is required to be placed in escrow upon making an offer on a property. This money is often refundable if financing cannot be obtained or other circumstances develop which preclude the purchase, but buyers should be aware of the need to have these funds available at the beginning of the home buying process.

Acceptable Sources of Funds for Cash Needs

An entirely different topic, but also important one is: “What are acceptable sources of funds for these cash needs?” This is a topic for another discussion in a later blog since it can be complicated. 

Additional Costs of Home Ownership

In addition to the “required” cash needs, don’t forget to take into consideration the additional costs associated with home ownership that you may not have taken into consideration, such as electricity, water, pool maintenance, general repairs, or unexpected emergency repairs. So, make sure you have prepared yourself for the responsibility of home ownership, by saving as much as you can before shopping for your dream home.

Take Away: Your Savings Plan

When creating a savings plan to buy a home, it’s helpful to set a goal for the minimum amount of money you need to save.

The savings you need is determined by a number of factors, including the types of home loans for which you could qualify. It’s helpful, therefore, to begin saving for a home by discussing your specific situation with a mortgage loan originator.

 

Credit Scores Explained

03/05/15 by Candace Morton

Credit Scores Explained

Lenders want to give you a mortgage, but they also want to minimize their own risk. The easiest way to retard risk is by using your credit scores to make lending decisions.

Credit scores are compiled separately by three consumer reporting agencies -- Equifax, Experian, and Trans Union. These credit reporting bureaus calculate scores differently, and base their scores on information that may differ from other bureaus.

Equifax Beacon 5.0 Facta: scores range from 334 to 818.

Experian Fair Isaac V2: scores range from 320 to 844.

Trans Union FICO Risk score Classic 04: scores range from 309 to 839.

Your credit score is a number that reflects the information in your credit report, whether you pay your bills on time, how much you owe creditors, payoffs, and derogatory information such as liens. It also includes inquiries into your accounts from lenders, landlords, and employers.

When you apply for a home loan, your application includes giving your lender permission to "pull your credit" and base the decision to lend to you and the rate of interest on the information contained in your credit scores. The higher the score, the better terms you'll receive from the lender.

Once your credit scores are reviewed by your mortgage lender, you'll receive a computer-generated report of the findings in the mail, but it won't have a copy of your entire credit report. It may include key factors that adversely affected your scores. Some examples might include:

  • Too many inquiries in the last 12 months
  • Time since most recent account opening is too short
  • Proportion of loan balances to loan amounts is too high
  • Too many accounts with balances
  • Amount owed on revolving accounts is too high

What if you're declined for the loan, or your lender wants to charge higher interest than you were expecting? Is there anything you can do?

Yes, talk to your lender and ask for help repairing or correcting your scores. For example, you may have innocently done something that resulted in a negative score, such as closing a line of credit. Or, you may not have realized that a late payment would bring your score down as much as it has. The lender will tell you exactly what you need to do.

Under federal law, you have the right to obtain a free copy of your credit report from each of the national consumer credit reporting agencies once a year. There are several sites where you can go to get your free reports including AnnualCreditReport.com or FreeCreditReport.com.

If you find an error such as derogatory data that doesn't belong to you, or an account that shows the wrong balance, simply show the lender your canceled check, release of lien or other proof that the credit report is wrong.

You'll also have to correct the information yourself separately with each agency, and it may take a few weeks for the agencies to record the updated information.

In the meantime, work with your lender and do what he/she tells you to do to get the best rate, including paying more than the minimums, paying on time, and making sure that your debt to income is well within your ability to repay all your loans. 


Does Home Staging Work?

03/05/15 by Candace Morton

Does staging add value to the home-selling process?

Home's potential may be more apparent by decluttering, depersonalizing

From Realtors to bloggers to HGTV, sellers hear about the need to get creative to attract prospective buyers to their homes. Suggestions include filling the rooms with warm and inviting scents, providing the perfect lighting, or playing up fun and interesting features.

Another popular option is home staging, which involves arranging and decorating the home in a way that appeals to a wide range of buyers. According to the National Association of Realtors, 96 percent of Realtors who have experience assisting buyers thought that staging had an impact on buyers at least some of the time (49 percent reported staging had an impact on buyers most of the time, while 47 percent believe that staging impacts buyers some of the time).

In my experience, this is a difficult task for most many homeowners. From a professional point of view, it doesn’t matter if the dining room is staged with a beautifully set table when the walls show flowered wallpaper from the 1980s, for example! The living room or a bedroom might have a professional home stager’s touch, yet if the carpet is worn and wall color is anything but neutral, it will still lose appeal. Have you ever seen a car for sale that was freshly washed and waxed with that new car smell, but the tires were worn out and it leaked oil? You see my point.

My first advice to a homeowner looking to put a home on the market is to start the staging process by removing clutter and depersonalizing the home. The buyer has to feel like it is home for them, not someone else!

For example, I recommend that sellers take photos off the mantle and refrigerator. I always encourage sellers to look at their home with the same eye they use to scan photos of their next home. If it distracts the eye, remove it! Furniture in rooms or traffic patterns that detract from the look of the house also need to be removed.

I walked into a master bedroom the other day that had two walls lined with bedroom and office furniture! The owners need to remove anything that doesn’t fit the utility of the room in order to maximize a buyer’s ability to see the potential in the space.

I have seen homes that moved quickly merely due to where the structure was located. I have seen homes sell quickly because of the school district — it was very clear that no professional stager had ever darkened the threshold of the house, yet the home sold and sold for list price. In the practical reality of everyday life, most sellers don’t get a home inspection prior to listing (even though they should), and most don’t stage a home. Yet the homes sell.

Always declutter and depersonalize a home prior to listing. Get the bad smells out! Remove anything that limits traffic patterns. Paint the walls with neutral colors and replace the carpet if it looks worn out. These tasks should be completed well before any attempt is made to stage a home. People can see through the nice décor to the frayed carpet underneath!

In the end, make it shine online, and as long as the home feels well-maintained, it will sell — and sell for top dollar.


Tax Credit Info For Homeowners

02/20/15 by Candace Morton

5 Tax Savings Tips For Homeowners!

Your home is a great source of tax savings if you know what qualifies and don’t forget to claim deductions and credits. If you missed any of these five, you can go back in time — roughly two to three years — by amending your tax return. 

1. Home Office Deduction
If your home is your principal place of business, you can take a standard deduction or deduct a percentage of eligible home expenses like:

Utilities

Mortgage interest for the proportion of the house used as your office Home repairs and maintenance

Forms you'll need to file an amendment:

1040
Form 8829 and Schedule A (if you're employed by someone else) for the year you’re amending 

Schedule C (if you're self-employed) for the year you’re amending

2. Energy Tax Credit

If you installed energy-efficiency improvements (like HVAC systems, insulation, a roof, windows) in 2012 and 2013 and didn’t take a tax credit for those upgrades, you may have missed out on up to $500.

My husband and I didn’t claim the energy tax credit for insulation we installed one year because we thought we’d get a better deal if we claimed the credit the next year when we planned to replace windows. But we never got around to replacing the windows. So we amended our return to claim the tax credit for the insulation and got a $500 tax credit.

If you want to amend your 2012 return, you have until 2015.

Forms you need:

1040X
Form 5695 for the year you’re amending

Note: Unless Congress extends it, the $500 lifetime residential energy tax credit ended in 2014.

3. Home Improvement Sales Tax Deduction

If your state and local town doesn’t tax income, you can amend Schedule A to deduct state and local sales tax you paid. Say you added new siding for $10,000 and your state charged 6% in sales tax. That’s potentially a $600 deduction.

Use the IRS's online sales tax calculator to figure out the total sales tax you can deduct. Have the receipts to prove you paid the sales taxes.

Forms you need:

1040x
Schedule A for the year you’re amending

4. Property Tax Deduction

Get a copy of your tax bill payment from the local tax office that collects the bill. Make sure you deduct the property tax expense on your amended return for the year you paid it, which could be different than the year it was due.

Forms you need:

1040x
Schedule A for the year you’re amending

5. Home Repair Deduction

Red alert: You can’t claim deductions for any old home repair. There are only two narrow, possible ways to claim home repairs, and it's always best to check with a tax pro for your particular situation:

If part of your home is used for business and you aren't taking the standard deduction for your home office. You can only claim repairs made to your home office or claim a percentage of the repairs you make to the house as a whole, like repainting or patching a roof leak. If 10% of your home is office, you can deduct 10% of the repainting or patching. If the repair is to the office itself only, then the percentage generally does not apply.

Forms you need:

1040X
Form 8829 and Schedule A (if you're employed by someone else) for the year you’re amending
Schedule C (if you're self-employed) for the year you’re amending

For casualty losses. Calculating and deducting casualty losses (disaster, damages, robbery) is complex. Everything from your income level to how you value your property can affect overlooked deductions. Besides placing a value on your personal property, you have to subtract a number of things from that, including insurance reimbursement and a percentage of your adjusted gross income. Read IRS Publication 547 and consult a tax adviser. Note that you can claim losses from federally declared disasters either in the year they occur or, if it's more favorable, on the preceding year's taxes.

Forms you need:

1040X
Form 4684 for casualty and theft for the year you’re amending
Schedule A for the year you’re amending

This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.


Wine Trail Valentine's Celebration

01/30/15 by Candace Morton

Looking for something fun to do for Valentine's weekend then I have just the idea!  Wine taste on the Placer County Wine Trail with 18 wineries tantalizing your taste buds with superb wine and all kinds of delectable sweets!  I did this event a couple of years ago with a girlfriend and we had a blast.  Everyone is in high spirits enjoying  this special event and running into fellow wine tasting acquaintances and friends along the way.  The wineries go all out and you really feel like your were pampered.  It is also romantic since many of the wineries have beautiful grounds and vistas.  So maybe I will see you out there.  I plan on checking a few of my favorites and some new ones I've missed!

For more info click here.