So you want to buy a house. Where do you begin? You go online or grab the local swap sheet and start looking at houses? Traditionally yes, and that may be a good way to start. You familiarize yourself with prices and inventory... all good things. Eventually you will want to get your own buyer's agent and get them under contract to represent you.
Now, do not just go out and grab the first one you talk to. You should interview them and determine whether they understand their obligation to you. The State of California has updated its agency laws in recent years and this has changed the way that agents treat their clients and customers. All of it gets rather complex and it would be easier to draw diagrams at this point, which capability I do not currently have so... if you are really interested contact me and I will gladly draw you a picture (literally) of how the concept of agency works in a real estate setting.
For the time being I want to let you know about an agent's Fiduciary responsibility to you as a client. Fiduciary is a term used to denote being in a position of faithfulness and trust, in real estate terms this is in regard to your money and real property interests. As your buyer's representative I must place your financial interests above my own in regards to real estate. That means that I have a legal obligation to use my expertise to counsel, warn and guide you in the purchase of property. Even though I only get paid after you close escrow and I think I might be able to push you to buy this place that has a price tag on it that works for me I am legally bound to set my personal interests aside and do what is right for you. (I would say that I am morally bound as well, because to me a clear conscience makes a great pillow and I love my sleep.) But, this duty is owed only if we have a written agreement in place stating that I am representing you exclusively as a buyer. Now, yes I would have to be honest about property details, but I do not have to go above and beyond to discuss your financial and property goals with you. You would be on your own to figure that out... unless you have an agreement in place.
So if you go into the top Real Estate office in town and an agent shows you a bunch of houses, smiles alot and you end up feeling really great about the house that that agent is also listing... well don't. Start by clarifying whose interests the agent is going to represent and get it in writing. This legal relationship may change in the course of your house shopping and that is okay, but you deserve to understand why and how it changes. Again the explanation is much easier with diagrams so contact me if you want to learn more.
Now how does your buyer's representative, who has stuck with you and guided you through the often murky waters of the property purchasing process get paid? Well they will get paid from the proceeds of the purchase. The commission is built into the price of the home and divided amongst all the agents and brokers who coordinate, generate, and maintain the legal documentation, professional relationships, licensing requirements etc. that allowed you to buy that property with all of the disclosures, title and contract insurance and legal protections in place to assure you that you now own, in fact, what you paid for and nothing more (termite infestation), or less. (missing square footage??)
Tuesday, February 25, 2014
Pre-Qualified vs. Pre-Approved vs. Final Approval
The terminology surrounding and even the actually act of getting a home loan may seem confusing, overwhelming, or complicated. I am going to attempt to clarify the terms most commonly heard when trying to get a home loan.
Pre-Qualified: This is a no commitment term that pretty much anybody can do who understands the math required. You can do this at home if you like to figure out how much a lender MIGHT be willing to lend you. Or you can contact me and i can ask you a few questions about your finances and give you a ROUGH estimate of what price of a home a lender MIGHT be willing to make a loan to you. This will be based on a percentage of your Gross annual income as well as your total DTI (Debt To Income) ratio. DTI includes car payments, credit card debt, child support and any other financial obligations you may have. This does not include things like utilities, because technically if you do not wish to buy power from SCE you are not obligated to. I am not including the percentages here because lenders change their criteria based on current market trends, Government regulations and their own risk tolerance.
Pre-Approval: This is a written commitment on the part of the lender to fund a portion of the purchase price of your home. In the process of pre-approving you for a loan the lender will pull your credit report and request and verify your financial information, such as tax returns (traditionally the prior two years), bank statements (to verify down payment funds, they also want to know that you have the ability to fund your portion of the home purchase price), employment history (traditionally two years) and maybe a few other things that will give them warm fuzzies as they write that check for tens to hundreds of thousands of dollars. Once they are satisfied that you are financially fit to lend to then they will give you a letter with the terms and conditions that they are comfortable with, such as the value of the loan, the time frame for payments (amortization schedule, balloon payment schedule) and the interest rate for the loan. This letter will be required when you make a offer on a house along with your earnest money deposit into escrow.
Final Approval: This happens at the end of the escrow process and there are KEY REQUIREMENTS that must be adhered to and completed before the lender will release their funds. An appraisal will be performed to determine the actual current market value of the house. The lender will be securing their loan with a recorded Trust Deed on the property being purchased and they want to make sure that if you default on your obligation to pay them that they can re coupe as much of their funds as possible. The lender will also perform a final check on your finances so keep your tax records and employment history handy along with everything else that they asked for at the start. You may need to resend it to the loan officer again in order to get the loan. Also... here it comes... WARNING: DO NOT make a major changes to your credit profile while you are in escrow. That means no new credit cards, do not finance a new car (I know you are excited about your new life in that awesome house, but just wait the 30-45 days) if you make major changes like these you can throw yourself out of the lender's credit criteria and you will face the threat of falling out of escrow and losing the house along with your earnest money deposit. Paying off a small debt on a credit card or making a final payment on the car you have had won't drastically alter the lender's opinion of your credit, those kinds of activities just make you look financially responsible which will most likely add to the warm fuzzy factor when the lender disburses funds. After you get the final approval that is when pens come out, property title is transferred, you get keys and move-in!
Yay for you!
Pre-Qualified: This is a no commitment term that pretty much anybody can do who understands the math required. You can do this at home if you like to figure out how much a lender MIGHT be willing to lend you. Or you can contact me and i can ask you a few questions about your finances and give you a ROUGH estimate of what price of a home a lender MIGHT be willing to make a loan to you. This will be based on a percentage of your Gross annual income as well as your total DTI (Debt To Income) ratio. DTI includes car payments, credit card debt, child support and any other financial obligations you may have. This does not include things like utilities, because technically if you do not wish to buy power from SCE you are not obligated to. I am not including the percentages here because lenders change their criteria based on current market trends, Government regulations and their own risk tolerance.
Pre-Approval: This is a written commitment on the part of the lender to fund a portion of the purchase price of your home. In the process of pre-approving you for a loan the lender will pull your credit report and request and verify your financial information, such as tax returns (traditionally the prior two years), bank statements (to verify down payment funds, they also want to know that you have the ability to fund your portion of the home purchase price), employment history (traditionally two years) and maybe a few other things that will give them warm fuzzies as they write that check for tens to hundreds of thousands of dollars. Once they are satisfied that you are financially fit to lend to then they will give you a letter with the terms and conditions that they are comfortable with, such as the value of the loan, the time frame for payments (amortization schedule, balloon payment schedule) and the interest rate for the loan. This letter will be required when you make a offer on a house along with your earnest money deposit into escrow.
Final Approval: This happens at the end of the escrow process and there are KEY REQUIREMENTS that must be adhered to and completed before the lender will release their funds. An appraisal will be performed to determine the actual current market value of the house. The lender will be securing their loan with a recorded Trust Deed on the property being purchased and they want to make sure that if you default on your obligation to pay them that they can re coupe as much of their funds as possible. The lender will also perform a final check on your finances so keep your tax records and employment history handy along with everything else that they asked for at the start. You may need to resend it to the loan officer again in order to get the loan. Also... here it comes... WARNING: DO NOT make a major changes to your credit profile while you are in escrow. That means no new credit cards, do not finance a new car (I know you are excited about your new life in that awesome house, but just wait the 30-45 days) if you make major changes like these you can throw yourself out of the lender's credit criteria and you will face the threat of falling out of escrow and losing the house along with your earnest money deposit. Paying off a small debt on a credit card or making a final payment on the car you have had won't drastically alter the lender's opinion of your credit, those kinds of activities just make you look financially responsible which will most likely add to the warm fuzzy factor when the lender disburses funds. After you get the final approval that is when pens come out, property title is transferred, you get keys and move-in!
Yay for you!
Buyer's No Cost Guarantee
Okay, so this is how it works... If I do not help you find and buy a house that fulfills your goals, you pay me nothing for my services.
Of course if I am going to commit my time and effort to helping you achieve your goals I will need some assurances that you are committed to the process. First thing that you will need is a pre-approval letter from a lender, which is a firm commitment from a lender to fund part, or in some circumstances (if you are a veteran) all of the price of the home you wish to buy. There are certain stipulations required before the lender will release the funds of course which are discussed in my post titled Pre-Qualified vs. Pre-Approved vs. Final Approval. Once you have that bring it to me and we will further discuss your real estate goals... time frame, neighborhood, bedrooms, bathrooms, amenities and the like. From there we will decide if we want to work together. After that I will commit on paper to be your representative in a future real estate purchase and will handle the negotiation, legal documentation and scheduling of certain key things that need to happen before you can get the keys to your new home.
Sounds fair right? How do I get paid? Well, the way things work in California and most traditional real estate transactions in the US is that the fees for the buyers' representative are built into the cost of the home. The agent is paid from the proceeds of the sale. Please see my post entitled Buyer's Agent for a more in depth explanation.
Of course if I am going to commit my time and effort to helping you achieve your goals I will need some assurances that you are committed to the process. First thing that you will need is a pre-approval letter from a lender, which is a firm commitment from a lender to fund part, or in some circumstances (if you are a veteran) all of the price of the home you wish to buy. There are certain stipulations required before the lender will release the funds of course which are discussed in my post titled Pre-Qualified vs. Pre-Approved vs. Final Approval. Once you have that bring it to me and we will further discuss your real estate goals... time frame, neighborhood, bedrooms, bathrooms, amenities and the like. From there we will decide if we want to work together. After that I will commit on paper to be your representative in a future real estate purchase and will handle the negotiation, legal documentation and scheduling of certain key things that need to happen before you can get the keys to your new home.
Sounds fair right? How do I get paid? Well, the way things work in California and most traditional real estate transactions in the US is that the fees for the buyers' representative are built into the cost of the home. The agent is paid from the proceeds of the sale. Please see my post entitled Buyer's Agent for a more in depth explanation.
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