Frequently Asked Questions

Q. How is a home's value determined?

You have several ways to determine the value of a home. An appraisal is a professional estimate of a propertys' market value, based on recent sale of comparable properties, location, square footage and construction quality.

A comparative market analysis is an informal estimate of market value performed by a real estate agent based on similar area sales and property attributes. Red Door Realty offers free analyses as part of our service.

Q. What is the difference between market value and appraised value?

The appraised value of a house is a certified appraisers' opinion of the worth of a home at a given point in time. Lenders (banks or other financial institutions) require appraisals as part of the loan application process; fees range from $150 - $350.

Market value is what price the house will bring at a given point in time. A comparative market analysis is an informal estimate of market value, based on sales of comparable properties.

Q. What standards do appraisers use to estimate value?

Appraisers use several factors when estimating a homes' value, including its size and square footage, the condition of the home and neighborhood, comparable local sales, any pertinent historical information, sales performance and indices that forecast future value. For detailed information on appraisal standards, contact the Appraisal Institute at 875 N. Michigan Avenue, Suite 2400, Chicago, IL. 60611-1980. (312) 335-4458.

Q. What can I afford?

Know 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 general, lenders don't want borrowers to spend more than 28% of their gross income per month on a mortgage payment, or more than 36% on debts.

It pays to check with several lenders before you starts searching for a home. Most will be happy to roughly calculate what you can afford and prequalify you for a loan. Many lenders will also be able to pre-approve you.

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

• 1. Gross income
• 2. Amount of cash you have available for down payment, closing costs and cash reserve required by lender
• 3. Your outstanding debts
• 4. Your credit history
• 5. Type of mortgage you select
• 6. Current interest rates

Another number lenders must 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 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 should be 34 to 38 percent.

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

Pre-qualification is how much you can get from the lender of your choice to purchase a home. Pre-approval is the amount your lender has already approved you for.

Q. How much will I spend on maintenance expenses?

Experts usually agree that you can plan on annually spending 1 percent of the purchase price of your house on repairing gutters, caulking windows, sealing your driveway and the myriad of other maintenance chores that come with the privilege of home ownership. Newer homes will likely cost less to maintain than older ones. It also depends on how well the house has been maintained over the years.

Q. How long do bankruptcies and foreclosures stay on a credit report?

Bankruptcies and foreclosures can remain on a credit report for seven to ten years. Some lenders will consider a borrower earlier if they have re-established good credit.

Q. How much does my real estate agent need to know?

Real estate agents would say that the more you tell them, the better they can negotiate on your behalf. However, the degree of trust you have with an agent may depend upon their legal obligation.

Agents working for buyers have three possible choices; they can represent the buyer exclusively, called single agency, or represent the seller exclusively, called sub-agency, or represent both the buyer and the seller in a dual agency situation. Some states require agents to disclose all possible agency relationships before they enter into a residential real estate transaction. Here is a summary of the three basic types:

• In a traditional relationship, real estate agents and brokers have a fiduciary relationship to the seller. Be aware that the seller pays the commission of both brokers, not just the one who lists and shows the property, but also to the sub-broker, who brings the ready, willing and able buyer to the table.
• Dual agency exists if two agents working for the same broker represent the buyer and seller in a transaction. A potential conflict of interest is created if the listing agent has advance knowledge of another buyers offer. Therefore, the law states that a dual agent shall not disclose to the buyer that the seller will accept less than the list price, or disclose to the seller that the buyer will pay more than the offer price, without express written permission.
• A buyer can also hire his or her own agent who will represent the buyers interests exclusively. A buyers agent usually must be paid out of the buyer's own pocket, but the buyer can trust them with financial information, knowing it will not be transmitted to the other broker and, ultimately, to the seller.

Q. Are commissions negotiable?

By law, real estate commissions are negotiable. The pricing of real estate service varies by level of service and consumer needs. Most agents charge between 6 and 8 percent for full service and not all offer the option of paying a fee for an individual service.

Q. What contingencies should be put in an offer?

Most offers include two standard contingencies; a financial contingency, which makes the sale dependent on the buyers' ability to obtain a loan commitment from a lender, and an inspection contingency, which allows buyers to have professionals inspect the property to their satisfaction. A buyer could forfeit his or her deposit under certain circumstances

Q. How can I save on closing costs?

Studies show that the closing costs, which can average 2 to 3 percent of a total home purchase price, are often more costly than many buyers expect. But there are some ways to save:

• Negotiate with the seller to pay all or part of the closing costs. The lender must agree to this as well as the seller.
  
• Get a no-point loan. The trade-off is a higher interest rate on the loan and many of these loans have pre-payment penalties. But buyers who are short on cash and can qualify for a higher interest rate may find a no-point loan will significantly cut their closing costs.
  
• Get a no-fee loan. Usually, though, these fees are wrapped into a higher interest rate though it will save you on the amount of cash you need upfront.
  
• Get seller-financing. This kind of arrangement usually does not entail traditional loan fees or charges.
  
• Rent the property in which you are interested with an option to buy. That will give you more time to save for the upfront cash needed for the actual purchase.
  
• Shop around for the best loan deal. Each direct lender and each mortgage brokerage has their own fee structure. Call around before submitting your final loan application.

Q. Where do I get information about closing costs?

For more on closing costs, ask for the "Consumer's Guide to Mortgage Settlement Costs", Federal Reserve Bank of San Francisco, Public Information Dept., P.O. Box 7702, San Francisco, CA. 94120. Or call 415-974-2163.

Q. What are closing costs?

Closing costs are the fees for services, taxes, special interest charges that surround the purchase of a home. They include up front loan points, title insurance, escrow or closing day charges, document fees, prepaid interest and propery taxes. Unless, these charges are rolled into the loan, they must be paid when the home is closed.

Q. Who pays the closing costs?

Closing costs are either paid by the home seller or home buyer. It often depends on local custom and what the buyer or seller negotiates.

Q. Why do I need a title report?

As much as you as a buyer may want to believe that the home you have found is perfect, a clear title report ensures there are no liens placed against the prior owners or any documents that will restrict your use of the property.

A preliminary title report provides you with an opportunity to review any impediment that would prevent clear title from passing to you. When reading a preliminary report, it is important to check the extent of your ownership rights or interest.

The most common form of interest is "fee simple" or "fee," which is the highest type of interest an owner can have in land. Liens, restrictions and interests of others excluded from title coverage will be listed numerically as exceptions in the report.

You also may have to consider interests of any third parties, such as easements granted by prior owners that limit use of the property. Some buyers attempt to clear these unwanted items prior to purchase.

A list of standard exceptions and exclusions not covered by the title insurance policy may be attached. This section includes items the buyer may want to investigate further, such as any laws governing building and zoning.

Q. Where are interest rates headed?

At any one time, no one knows for sure where rates are headed. Beyond public policies put in place by the Federal Reserve Board, there are no laws that govern mortgage rates. Historically, usury laws were used to prevent lenders from charging sky high interest rates when lending money. But in some states where there are usury laws, banks, thrifts and a number of other financial institutions are exempt from the law. Today, interest rates are governed solely by the financial markets and by Federal Reserve Board action, neither of which can be predicted with absolute certainty.

Q. How do you lock in an interest rate?

Locking in a mortgage rate with a lender is one way to ensure that same rate still will be available when you need it. Lock-ins make sense when borrowers expect rates to rise during the next 30 to 60 days, which is the usual length of time lock-ins are available. A lock-in given at the time of application is useful because it may take the lender several weeks or longer to prepare a loan application (though automated loan practices are cutting this time drastically).

However, some lenders require borrowers to pay lock-in fees to assure particular rates and terms. Be sure to check that the rates and points are guaranteed and that your lock-in period is long enough. If your lock-in expires, most lenders will offer the loan based on the prevailing interest rate and points. Lenders may have pre-printed forms that set out the exact terms of the lock-in agreement. Others may only make an oral lock-in promise on the telephone or at the time of application.

Q. How do you choose between fixed and adjustable rates?

There is a risk involved in selecting an adjustable interest rate mortgage, or ARM's, because rates may go up. On the other hand, a fixed-rate loan offers good protection against rising interest rates but the borrower is stuck with the initial rate if interest rates drop.

Statistics show that home buyers who have chosen ARM's since 1981 have saved thousands of dollars. For a period, the percentage of home buyers applying for ARM's rose substantially, then buyers and homeowners began flocking to fixed rate loans.

Whether to opt for a fixed or adjustable rate mortgage is a matter of personal choice. The first route offers stable payments, the second offers lower intial payments. Another consideration is the length of time a buyer plans to own the home. If you're planning on moving within three or four years, an ARM makes sense even if rates do nothing but rise during that period of time.

Q. What are rates for FHA and VA loans?

There are no set interest rates for VA and FHA loans. The FHA stopped regulating rates in 1983 and the VA followed suit soon after. Shop around for the best rate.

Q. How do you get a low interest rate loan?

Price discounts and interest rate buydowns are common incentives offered by new home builders trying to overcome slow sales. Buydowns are a financing technique use to reduce the monthly payment for the borrower during the initial years of the loan. Under some buydown plans, a residential developer, builder, or the seller will make subsidy payments (in the form of points) to the lender that "buy down", or lower, the effective interest rate paid by the home buyer.

State agencies often offer lower rate loans. But to qualify, borrowers usually must be a first time home buyer and meet income limits based on the median income level of their county.

Q. How are the rates set for seller financing?

The interest rate on an owner-carried loan is negotiable. Ask your agent to check with a lender or mortgage broker to determine the current rate on institutional first (or second) loans.

Seller financing typically costs less than conventional financing because sellers don't charge loan fees (points). Interest rates on an owner-carried loan will also be influenced by current Treasury bill and certificate of deposit rates. Sellers usually aren't willing to carry a loan for a lower return than they would earn if their money was invested elsewhere.