Home buying demystified

Home buying demystified

Relaxing, simplistic, fun: Hardly the words anyone who’s
considered purchasing a home would apply to the experience. And
yet, with the Federal Reserve expected to raise interest rates
again before the summer, now may be the time to buy, according to
industry analysts.
Relaxing, simplistic, fun: Hardly the words anyone who’s considered purchasing a home would apply to the experience. And yet, with the Federal Reserve expected to raise interest rates again before the summer, now may be the time to buy, according to industry analysts.

The process itself may sound daunting – just think about the words credit score and negative amortization – but when prospective homeowners get their finances together before window shopping, they’re less likely to be disappointed and more able to enjoy the house-hunting process, according to Wayne Carlson, a Gilroy-based real estate broker with more than 25 years experience. But the first step is selecting someone who will be there to represent your interests.

Carlson suggests selecting a competent, experienced broker or agent before seeking financing, not only to pave the way for a smooth house-hunt, but also to help you understand the local market better.

Potential buyers should discuss their personal wants and needs in terms of housing size, style, condition and terms with two or three real estate professionals to get a clear idea of what they are after and which professional will best be able to assist them, said Stephen Toste, a real estate agent and investment consultant for Century 21 in Hollister.

Some of the factors to consider, according to Toste, include the number of bedrooms and bathrooms as well as desired lot size and access to schools, parks and transit systems.

After that, it’s time to apply for financing, which will ultimately determine whether or not buyers will be lounging pool-side in a few months or working on restoring their somewhat-decrepit fixer-upper for many more to come.

Rising housing costs often dictate where, or even if, a new home buyer can purchase, since loan resources are limited by credit standing. In Gilroy, the average home sells for $440,000, well above the national average of $242,663 despite the fact that median income in the area only outpaces national median income by about $5,000 per year, according to CNN’s Money Magazine.

The national median income is $63,346, and Gilroy’s is $68,740. In Morgan Hill, the average home price is $505,000, and the median income is $88,242. In Hollister, home prices and incomes are lower, with home costs in Hollister weighing in around $380,000 and the median household income around $60,896, according to the magazine’s statistics

Having a sizable down payment to place on a new property can be helpful, especially for first-time buyers or those with fair to average credit, but an increasing number of local residents are opting for 100 percent financing, where they pay only closing costs on the property – generally around $5,000 to $7,000, leaving the buyer with the entire property price and loan interest to pay off, said Marcella Maninang, manager of Baytek Mortgage in San Jose, formerly American Residential Mortgage of Morgan Hill.

“A lot of our clients don’t have down payments, but we can work with that,” said Maninang. “There are wholesale lenders that will lend just based on their credit. They just have to have a 620 or above FICO score – that’s a credit score – and they don’t require any cash reserves.”

Such loans are based on stated income and often include provisions requiring at least two years of employment and strict interest rates, but these rates often improve if buyers are willing to submit the paperwork necessary for full documentation, which sets on paper the a buyer’s yearly earnings and a full accounting of assets, said Maninang.

“If you don’t have a down payment, but you can verify reserves that would let you make mortgage payments in an emergency, like having $6,000 in the bank when you owe $3,000 a month, you’ll do better,” said Maninang.

Credit standings account for most of the interest rate potential homeowners will be subject to, so it is in a buyer’s best interest to make sure credit is in good shape before consulting a lender, said Maninang.

Credit reports from all three major credit reporting services are free to California residents under new laws designed to help consumers spot identity theft, and it may be a good idea to pay off debts before diving in to the market as Maninang said lenders who offer loans to buyers with poor or little credit may require low debt-to-income ratios.

Buying a home is not a small decision, though, as Carlson reminds buyers, especially those who want to get into the market before it gets too high to invest and those seeking 100 percent financing.

“Regardless of your FICO score, if you lose your job or get hurt, you could be in a world of trouble,” said Carlson.

And Carlson isn’t the only one sounding a note of caution. “Buyer beware” is the warning from several international watchers of the American housing market. A 2004 article published in “The Economist” found that the United States’ housing price inflation reached its fastest clip since the 1970s in the second fiscal quarter of 2004, creating the biggest boom in real value prices in American history.

In the United States, housing values adjusted for inflation have increased at more than double the rate costs did in the 1970s and 1980s.

That’s good for sellers now, but if world trends are played out in the U.S. economy, hot spots like California and New York could be in danger of impending busts. And if northern European trends are anything like our own, even minor bobbles in the housing market could disrupt consumer spending to the point of recession.

Once buyers have reached approval on a loan they think is right for them, though, it’s time to start looking. With the fast-paced housing market, it pays to move quickly, and – not to worry – it’s also normal.

“I think any time you buy your home where your family is going to live, there’s a certain impulse and there are certain emotions,” said Carlson. “People see they can get a piece of the dream, and they want to grab on.”

Before making an offer, buyers should ask their real estate agent about the “support of comps,” or sale prices of similar properties in the area, said Toste. This will give them a better idea of whether the home is reasonably priced and if they may wind up in a bidding war.

“Once the offer is accepted, they should have standard inspections – home, termite and roof,” said Toste, who recommended buyers be present during the inspections in order to ask questions, unless the seller has already had the inspections done in order to clear the property sale sooner.

This portion of the process generally takes about 17 days, and after inspections are complete, buyers have the opportunity to negotiate any repairs that will be necessary on the home while the final loan is in process, said Toste.

Finally, the preliminary title report is reviewed by the lender, buyer and buyer’s agent, and an independent appraisal of the property is conducted before the house goes to escrow.

This treacherous sounding word refers to a third-party overview of all the documents involved in the transaction before the deed is handed over, but once it’s settled, the biggest question on most buyers’ minds will be who to invite to the housewarming party.

Doesn’t Uncle Larry give pretty good gifts?

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