Home Buyers Handbook
Home Buyers Handbook: Costs & Financing
Knowing your price range brings your house hunting into focus. Since most people will borrow money to make their house purchase, it helps to look at your finances as the lenders will.
The amount of money a lender will loan for your house purchase depends primarily on how much you can afford for the monthly payment and how much you can invest in the downpayment.·
- Monthly payments consist of the principal and interest on the mortgage loan, as well as property taxes and homeowner's insurance. These four costs are often abbreviated as PITI.
- Generally, lenders figure that the buyer shouldn't pay more than 28% of gross income for PITI, or 36% for both PITI and monthly long-term debts such as car payments, credit card payments, school loan payments, child support and alimony payments.
- The larger the downpayment, the less you need to borrow, which means a lower monthly payment. The obvious source of money for your downpayment is either your savings or the proceeds from the sale of a home you already own. But there are other sources that you may not have considered. Talk with your lender about acceptable downpayment sources.
- Conventional loans require a downpayment as low as 5% of the purchase price of the home. You will be required to buy private mortgage insurance (PMI) with a downpayment of less than 20% or in special higher risk situations. This insurance protects the lender in case of default and allows the lender to approve a larger mortgage amount than would otherwise be approved.
There are a multitude of financing options. You can go to mortgage bankers, savings and loans, or commercial banks. There are conventional mortgage, adjustable rate mortgages, balloon mortgages and assumable mortgages. Mortgages are available from the Federal Housing Administration, Veterans Administration and Iowa Finance Authority. Your QC Iowa Realty agent monitors mortgage rates and programs and will provide information to help you find the right mortgage. The demands of an increasingly mobile and educated home-buying public have made lenders respond more quickly to mortgage applications.
Buyer's Handbook: Finding the Right Home
House Hunting Begins at Home
The search for your dream home begins in your present home. By asking yourself key questions about what you like in your present home, you'll save time in the house-hunting process.
- What style of home do you like – two story, ranch, split-level, something else?
- What size of home do you need – number of bedrooms, baths?
- What are your priorities in home features - garage, gourmet kitchen, fireplace, first-floor family room, formal dining room or other feature?
- What natural features outside the home are most significant to you - woods, hills, streams, lakes, others?
Choosing Your Home
Contact an Iowa Realty sales associate to help you find the right home through the use of the Home Buyer's Guide T-III. This exclusive, computerized real estate information system allows you to look at homes on the market, inside and out. Our staff photographer takes photos of the exterior of every Iowa Realty home on the market in the Metropolitan Des Moines area, and many agents submit interior photographs. Your Iowa Realty associate will explain how he or she will represent you in the home buying process. Many people "decide with emotion and justify with facts." Your new home has to feel right, but it has to work right, too. You can evaluate many of the physical features yourself by systematically looking for certain details, outside, inside and throughout the house.
Structural and Mechanical Systems
Inspect the quality of materials and craftsmanship.
- Are exposed beams and joists in good condition?
- Do basement walls have any large cracks that may indicate a shifting foundation?
- Are there any mildew stains that indicate dampness or flooding?
- If the basement is not heated, is the ceiling insulated? Is the attic well-insulated?
- Is there any evidence of water damage from a leaky roof?
- Are floors springy or are they even and solid?
- Are walls (especially at door frames and windows) free from large cracks?
- Do all doors and windows work smoothly? Are bathroom fixtures in good condition?
- Does the faucet's water flow remain steady when toilets are flushed?
- Does water drain well?
- Are there enough well-placed electrical outlets in the room?
- Does the service to the house match its electrical needs?
- Is the capacity and recovery time of the water heater adequate for your family?
- Does the water heater show signs of rust?
- Do kitchen appliances seem to be in good condition (if included in the sale)?
- Will your appliances (if you're bringing them with you) fit in the present space?
- Do the furnace and/or air-conditioning unit(s) appear to be well-serviced?
- Is the fan quiet?
- Be very observant as you look around outside the house.
- Is the outdoor lighting adequate?
- Are the sidewalks and driveway in good condition?
- Will water drain off of the sidewalks and driveway?
- Are there any noticeable sags or dips in the roof?
- Are the shingles in good condition?
- Are the gutters in good condition, with tight seams and downspouts that point away from the house?
- Do the foundation walls have any cracks larger than 14-inch wide?
- Is the house's exterior surface in good condition?
- Are there cracks where materials meet at two walls or at windows and walls?
- Do windows, doors and the chimney sit square and plumb?
- Do outdoor electrical outlets have ground fault current interrupters to prevent shock?
- Is the lot sloped for proper drainage?
- Are there low spots near the house?
- Does the landscaping appear healthy?
- Are large trees at least 30 feet from the house?
Inside details - Make a sketch of the floor plan
- How many finished/unfinished rooms and bathrooms are on each floor?
- Does the main entry lead people directly to the living room or make them wonder which way to go?
- Are eating areas (including any located outdoors) easily accessible from the kitchen?
- Does traffic through the kitchen flow outside of the work area?
- Are the stove, sink and refrigerator arranged in an efficient working layout?
- Are there built-in appliances like a dishwasher, garbage disposal or trash compactor?
- Do open appliance doors block doorways, cabinets or each other?
- Is there adequate counter and cupboard space?
- Are bathrooms accessible without having to cross a bedroom or other living space?
- Is there adequate counter and storage space in the bathroom?
- Do bedrooms have two uninterrupted wall surfaces for easy furniture arrangement?
- Is there adequate closet/storage space?
A professional housing inspector can make sure the house and major mechanical systems are in sound condition. An inspector's report can help you make an informed decision and is well worth the cost.
Your sales associated will answer questions about the specific house you are seriously considering. These questions may include:
- What types of financing can be considered?
- Will the seller finance the mortgage for you?
- If so, what are the terms?
- Is the mortgage presently held on the house assumable?
- If so, what are the current interest rate and terms?
Choosing a Neighborhood
In many ways, choosing a house is easier than choosing a neighborhood. The neighborhood determines the value of the house. An old real estate maxim says there are three criteria that determine a property's market value: "location, location, location." The fact is that two identical houses built across town from each other can bring a sale price thousands of dollars apart. Your sales associate can give you information about market values of houses in various locations. But you must research to determine the right neighborhood for you.
- What are your preferences? Consider distance from work, shopping, schools, public transportation and recreation.
- When you drive around a neighborhood, consider the overall impression.
- Are other properties near the house you're considering well-maintained?
- Are business properties mixed in with residences?
- Are there apartments and condominiums, or only single-family houses?
- Are there parks, greenbelts, strip malls or outdoor spaces?
While you will form an overall impression by driving by, walking around and talking with other residents in the neighborhood, your sales associate can give you factual information about zoning covenants. These impact such things as allowable commercial and industrial uses, on-street parking availability, and the styles of houses that can be built in the future.
Buyer's Handbook: Negotiating the Purchase
Writing the Offer
When you've selected the house you want to buy, your next step is to submit a signed real estate offer to purchase. Your sales associate will take you through a step-by-step process to make the purchase.
- You know the seller's asking price, but you need to decide how much you'll offer. Consider factors like the length of time the house has been on the market, reasonableness of the price, availability of financing and other costs.
- Decide how much earnest money to offer. Determine what happens to this deposit. Usually, it is held by a third party until the sale is closed or the contract is broken. When the sale is closed, it is applied to the downpayment or closing costs. But if you fail to buy the house after the seller has accepted your offer, the seller has the right to keep this earnest money. Decide the type of deed you want. You'll most likely specify that the seller convey the property with a general warranty deed that transfers ownership rights (title) to you.
- Specify your desired closing date and possession date. Allow yourself enough time to obtain financing.
- You may want to include a contingency plan for closing and occupancy in case you can't secure possession on the agreed date. This may include provisions such as a daily rent-back agreement for "post-settlement occupancy" by the seller.
- Decide what items you want to buy with the house. Items often specified in the offer to buy include appliances, light fixtures, chandeliers, window coverings and swing sets.
- Determine what special provisions should be included for items such as property taxes, hazard insurance and utility bills.
- Require the seller to conduct a title search to prove the title is clear. The title should show no substantial claims or liens against the property.
- Determine if you want the seller to provide a homeowner's warranty on the property.
Presenting the Offer
Your sales associate will present the offer to the seller or the seller's agent. The seller will either accept, reject or counter your offer with changes in the terms. You may either sign it as it is showing your agreement, or make a counteroffer. When both the seller and buyer agree to the terms and sign the document, it becomes a valid contract.
Buyer's Handbook: Obtaining Financing
Once you learn the seller has accepted your offer, your key job is to obtain financing. If you have already been pre-approved, you're well on your way to having all the needed information and documentation organized. Here's a list of information you will need to provide for most loan applications.
10 Things Most Lenders Request
- The amount of money you wish to borrow and the length of time you will need the money.
- Your current address and, if you've been at that address less than two years, your previous address.
- Your Social Security number.
- Your present employer's address, and if you've been at your present job less than two years, your former employer's address.
- Copies of your paystubs. Your gross monthly income.
- Copies of monthly bank statements.
- A list of your assets - real estate, personal property, paid-up life insurance.
- A complete list of outstanding debts and the account numbers.
- A copy of the sales contracts for the property you wish to finance.
- A written statement clarifying any problems with the loan application.
With this information, the lender will follow these steps to process your application:
- Verify the facts.
- Request and review your credit report.
- Make a property appraisal.
- Review your application.
- Determine whether to make the loan.
Things You Should Ask the Lender
- What types of mortgage loans does the financial institution offer?
- Is the mortgage open-ended?
- Can you borrow up to the amount of principal you've paid to make home improvements?
- What is the interest rate?
- If the rate drops, what is the cost to refinance at a lower interest rate?
- Will mortgage insurance be required for loans other than FHA-insured or VA-guaranteed mortgages?
- How much principal must be paid before the insurance requirement is dropped?
- What are the premiums and are the premiums refundable if you prepay the mortgage?
- What reserve, such as those for property taxes or hazard insurance, are required?
- How long must you pay into these reserves?
- At some point, will you pay these costs directly?
- What fees will be charged at closing, including points, loan origination, abstracts, attorney's fees, appraisals, termite inspections reports or credit reports?
Within three days of applying for the loan, your lender should issue you a good faith estimate of the fees charged for closing. This estimate may not include deposits for hazard insurance or property taxes.
What to Expect
- Loan origination fees are a percentage of the loan that cover the lender's administrative costs. The loan discount, referred to as points (with each point equaling 1% of the loan), is extra interest paid to the lender to make up the difference between market interest and the interest of the loan.
- Survey, appraisal or inspection charges that the lender incurs to establish the value and condition of the house.
- Assumption or transfer fees on assumable mortgages.
- Charges to title/abstract searches, and recording and transfer charges.
- Mortgage interest, the first year's hazard insurance and the first year's mortgage insurance (if required) that are paid to the lender in advance.
- Reserved deposits that are used by the lender to pay for hazard insurance, property taxes and mortgage insurance are also paid at closing.
- Other fees may include a variety of services, such as document preparation, notary services, handling the schedule and warranties.