Buying Q&A

Who pays your Brokerís real estate commission?

In most cases, the seller pays all real estate commission. So, Randallís services to help you find a home should cost you nothing.

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What is the difference between pre-qualification and pre-approval?

Determining what you can afford is one of the first steps, which can be achieved by prequalifying for a home loan. This step will help you narrow your search for both a neighborhood and particular houses.

A prequalification is a simple calculation that considers several factors, but primarily your income. There are no guarantees with a prequalification, but it will be expected of you when you make an offer on a home. A pre-approval takes more time and documentation but results in a guarantee from the lender that you will be approved for the amount you can afford.

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How much can I afford?

Knowing what you can afford is the first rule of home buying, and that depends on how much income and how much debt you have. In addition, your credit score plays a factor. In general, lenders don't want borrowers to spend more than 28 percent of their gross income per month on a mortgage payment or more than 36 percent on total debts including the mortgage payment. With excellent credit, lenders will allow higher percentages of your income to be applied to your housing and total debt.

The price you can afford to pay for a home will depend on six factors:

  1. Gross income
  2. The amount of cash you have available for the down payment, closing costs and cash reserves required by the lender
  3. Your outstanding debts
  4. Your credit history
  5. The type of mortgage you select
  6. Current interest rates

Another number lenders use to evaluate how much you can afford is the housing expense-to-income ratio. It is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your new home loan, property taxes and hazard insurance (or PITI as it is known). If you have to pay monthly homeowners association dues and/or private mortgage insurance, this also will be added to your PITI.

This ratio should fall between 28 to 33 percent, although some lenders will go higher under certain circumstances. Your total debt-to-income ratio including your mortgage payment should be in the 34 to 38 percent range. Again, with excellent credit, you may be able to exceed these ratios.

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What are Foreclosures?

A foreclosed property is a home that has been repossessed by the lender because the owners failed to pay the mortgage. Thousands of homes end up in foreclosure every year. Many people lose their homes due to job loss, credit problems or unexpected expenses.

It is wise to be cautious when considering a foreclosure. Many experts, in fact, advise inexperienced buyers to hire an expert to take them through the process. It is important to have the house thoroughly inspected and to be sure that any liens, undisclosed mortgages or court judgments are cleared or at least disclosed.

In most states, a foreclosure notice must be published in the legal notices section of a local newspaper where the property is located or in the nearest city. Also, foreclosure notices are usually posted on the property itself and somewhere in the city where the sale is to take place.

When a homeowner is late on three payments, the bank will record a notice of default against the property. When the owner fails to pay, a trustee sale is held, and the property is sold to the highest bidder. The financial institution that has initiated foreclosure proceedings usually will set the bid price at the loan amount.

Despite these seemingly straightforward rules, buying foreclosures is not easy as it may sound. Sophisticated investors use the technique so novices may find themselves among stiff competition.

Judicial foreclosure action is a proceeding in which a mortgagee, a trustee or another lien holder on property requests a court-supervised sale of the property to cover the unpaid balance of a delinquent debt.

Nonjudicial foreclosure is the process of selling real property under a power of sale in a mortgage or deed of trust that is in default. In such a foreclosure, however, the lender is unable to obtain a deficiency judgment, which makes some title insurance companies reluctant to issue a policy.

Buying directly at a legal foreclosure sale is risky and dangerous. It is strictly caveat emptor ("Let the buyer beware").

The process has many disadvantages. There is no financing; you need cash and lots of it. The title needs to be checked before the purchase or the buyer could buy a seriously deficient title. The property's condition is not well known and an interior inspection of the property may not be possible before the sale.

In addition, only estate (probate) and foreclosure sales are exempt from some statesí disclosure laws. In both cases, the law protects the seller (usually an heir or financial institution) who has recently acquired the property through adverse circumstances and may have little or no direct information about it.

Buyers considering a foreclosure property should obtain as much information as possible from the lender, including the range of bids expected.

It also is important to examine the property. If you are unable to get into a foreclosure property, check with surrounding neighbors about the property's condition.

It also is possible to do your own cost comparison through researching comparable properties recorded at local county recorder's and assessor's offices, or through Internet sites specializing in property records.

The U.S. Department of Housing and Urban Development acquires properties from lenders who foreclose on mortgages insured by HUD. You can only buy HUD-owned properties through a licensed real estate broker, whose commission will be paid by HUD.

Down payments vary depending on whether the property is eligible for FHA insurance. If not, payments range 5 to 20 percent. When the property is FHA-insured, the down payment can go much lower. Each accepted offer must be accompanied by an "earnest money" deposit equal to 5 percent of the bid price not to exceed $2,000, but not less than $500.

You should be aware that HUD homes are sold "as is," meaning limited repairs have been made and no structural or mechanical warranties are implied.

If you are strapped for cash and looking for a bargain, you may be able to buy a foreclosure property acquired by the U.S. Department of Housing and Urban Development for as little as $100 down.

The U.S. Department of Veterans Affairs also offers foreclosure properties which can be purchased directly from the VA, often well below market value and with a down payment amount as low as 2 percent for owner-occupants

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