What Is a REALTOR®?

Every state has its own laws governing real estate licensing; there is no national license. In Indiana, agents are required to successfully complete 54 hours of instruction at an accredited school and to pass a licensing exam. They must also complete 16 credits of continuing education every two years in order to maintain their licenses. In addition, any agent who identifies him- or herself as a REALTOR® has affiliated with the National Association of REALTORS® and has pledged to adhere to their code of ethics and professional standards. All sales associates with the F. C. Tucker Company are REALTORS®.

With two years of selling experience, agents may return to school, pass another class and exam, and become licensed as real estate brokers. At this point they can go into business for themselves if they choose.

Real estate agents must affiliate with a broker before they can conduct real estate transactions. They operate on behalf of the broker, and he/she is legally responsible for their professional conduct. Any listings an agent has legally belong to the broker.

Who Do REALTORS® Represent?

The answer to this question used to be somewhat complex, but in recent years, the laws have been simplified. Now, agents working with a buyer represent the interests of the buyer and those working with a seller represent the interests of the seller. In practical terms, this means that whether you are a buyer or seller, your agent is now required to

• Exercise reasonable skill and care in performing their duties
• Deal with you as a client honestly and fairly
• Disclose all facts which are known to the agent (or may be reasonably discovered) that affect the value or desirability of any property you are considering.
• The only exception to this law is when a buyer wants to buy a home listed by his/her own agent-or by an agent affiliated with the same broker (since the listings legally belong to the broker). In this situation, the agent becomes a "limited agent," representing the interests of both parties. This limited agency must be disclosed, and both the buyer and the seller must give their consent in writing for the transaction to move forward.

How Are REALTORS® Paid?

Real estate agents are paid on commission, generally a percentage of the selling price of the home. The commission for a particular transaction is established in the listing agreement between the seller and his/her agent.

The commission is paid at closing. The selling agent’s broker receives a portion of the commission, and the buying agent’s broker receives the other part. Each agent’s broker then pays him/her a portion of the commission.

Why Should You Work With a REALTOR® When You Buy?

There are many compelling reasons to use a real estate agent when you buy a home:

• They have access to the Multiple Listing Service (MLS) which allows them to search for available homes that meet your criteria.
• They will handle the administrative details of scheduling showings for the homes you would like to see.
• They save you time by providing you with information about schools, neighborhoods, etc.
• When you find a home you think you might be interested in, they can use the MLS to find out the list prices of other homes for sale in the area as well as the sales prices of those that have recently sold. This can help you determine the fair market value of the home before you make an offer.
• They will guide you through the maze of offers and counteroffers, inspections and amendments-always looking out for your best interests. Their advice and insight in these areas can help you avoid potential pitfalls and may save you from costly errors. Your agent will know, for example, which items in the home need to be included in the purchase agreement; some items can be assumed to stay with the house while others must be specifically stipulated. If the inspection uncovers problems, your agent will help you negotiate changes with the seller. Most real estate agents will not tell you what to do, but their training, previous experiences, and professional contacts can help you make better, more informed decisions.
• They can help you find a reputable mortgage company.
• They will explain the closing process and all of the paperwork involved.

Getting Pre-qualified for a Loan

Before you progress too far into the home-buying process, it’s a good idea to talk with a lender about pre-qualifying for a loan. Pre-qualification will let you know how much money you will be able to borrow, so that you know your price range for your home search. Having a pre-qualification letter also assures sellers that you are a serious potential buyer.

How Much Can You Pre-Qualify For?

What you can afford will depend on your income and your debt. In general, lenders don’t want borrowers to spend more than 28 percent of their gross monthly income on a mortgage payment (your "housing expense ratio") or more than 36 percent on all debt payments combined (your "debt-to-income ratio.") They will define your total mortgage payment as the sum of your principal, interest, taxes, and insurance (known by the acronym PITI), and they will define your long-term debt as any monthly payments which will take ten months or more to pay off.

Low housing expense and debt-to-income ratios do not guarantee that you will qualify for a loan; neither do high ratios always signal a denial. In addition to your gross income and your current debt, potential lenders will consider these factors to determine how much you can borrow:

• The amount of cash you have available for the down payment investment, closing costs and necessary reserves
• Your credit history
• The type of mortgage you are considering
• Current interest rates
• It is true, however, that the more you increase your other debt, the less borrowing power you have for a mortgage.

Click on the Mortgage Info button to the left or follow these steps to get a general idea of how you will pre-qualify:

1. Calculate your gross monthly income.
2. Multiply your gross monthly income by 28% (.28). This is your maximum monthly housing expense payment.
3. Multiply your gross monthly income by 36% (.36). This is your maximum allowable total debt payment.
4. How much do you owe each month on long-term debt payments (e.g., credit cards, loans, child support payments, etc.)? Enter that number here.
5. Subtract line 4 from line 3 to determine the maximum amount you can spend on debt. This is the income you have available for your monthly mortgage payment.
6. Use the smaller of line 2 and line 5 as your maximum housing payment. Multiply that number by 75% (.75). (This assumes that 25% of your payment would be spent on taxes and insurance.)

Line 6 is the maximum monthly principal and interest you can afford. The following table will show you how the monthly payment relates to your loan amount.

What Lenders Need to See

We said earlier that potential lenders will consider six factors to determine how much you can borrow:

• Your gross income
• The amount of cash you have available for the down payment investment, closing costs and necessary reserves
• Your current debts
• Your credit history
• The type of mortgage you are considering
• Current interest rates
• To verify your income, you will need to provide your lender with
• Recent pay stubs
• Two years of W-2 statements
• Two years of federal tax returns
• To verify your available cash, your lender will want to see your two most recent bank statements for both your savings and checking accounts.

To verify your current debts and your credit history, your lender will order a copy of your credit report. Even if you don’t anticipate any problems, it's a good idea to order a copy of your report before you begin the loan application process. This will give you time to clean up any errors or problems that may show on the report.

You can obtain a copy of your credit report from one or all of the three credit reporting agencies:

• Trans Union (www.transunion.com / 1-800-888-4213),
• Equifax (www.equifax.com / 1-800-997-2493), and
• Experian (www.experian.com / 1-888-397-3742).

You can also look in the yellow pages under "Credit Reporting Agencies" for a location near you. The reports should cost under $10 each, and it’s a good idea to get a report from all three companies since they may not be exactly the same.

Correcting Credit Problems

Your first credit problem may be lack of a credit history. You can approach this problem in a couple of ways. First, you can begin to build your credit by getting a credit card and charging small amounts on it. By paying it off each month, you will be establishing a positive credit history without incurring finance charges. Second, you can ask your lender to establish a nontraditional credit history which uses payment information from monthly obligations other than loans: utility bills, rent payments, telephone bills, etc.

If you have a credit history, the credit report will list all of the consumer credit that has been extended to you in the last seven years. For each account, it will show:

• A comment about the account such as current or delinquent (and if delinquent, for how long)
• The status of the account: positive, non-evaluated or negative
• The date the account was opened
• Scheduled monthly payment amounts
• The date the last payment was made
• The type and terms of the account
• Your payment history over the last 12 months
• The original loan amount, credit limit or original amount charged to loss
• The balance owing and amount past due, if any.
• If a payment was over 30 days late one time, it might not show on the report. If, however, payments were over 60 days late four times, over 120 days late two times, or over 180 days late one time, your credit will be seriously affected, and this will impact your ability to borrow money.

Sometimes problems will crop up on a credit report because there has been a misunderstanding or error. If you find such a problem on your report, contact the billing department for that account and have them correct it. Keep written copies of your correspondence and keep notes of phone conversations which include the names of the people with whom you have spoken, the dates of the calls and the outcome of each call. Write a letter explaining the error to the lender and attach it to the credit report. Submit copies of your written correspondence and notes from conversations with the creditor as further documentation.

If a poor credit rating is the result of past problems, you need to be aware that there are no quick fixes for a poor credit history. Be patient, and improve your credit rating by

• Contacting each creditor and explaining your situation. Send a good faith letter demonstrating your willingness to pay off the account and include at least a partial payment, if possible.
• If credit problems are associated with a specific incident such as a car accident, sudden illness or loss of a job, write a letter of explanation to the credit bureau explaining the circumstances.
• If you have outstanding collections or judgments against you, take steps to pay them off. Contact the creditors and begin making regular payments, however small.
• Always include your name, address, telephone number, and account names and numbers on any correspondence with creditors, credit bureaus and lenders. Let them know when and where you can be reached.
• As a last resort, get professional assistance from a nonprofit credit counseling service, but be aware that they are primarily representing your creditors' interests. They will make arrangements with your creditors to pay off a percentage of your debt, spread over a longer period of time so that your monthly payments are lower. Then they will arrange with you to pay a higher percentage of the debt, and they pocket the difference. They do nothing to resolve the bad credit history that drove you to them in the first place.
• There is hope even if your credit rating is not what it needs to be. Remember that negative credit information is only reported in your credit file for seven years (with the exception of bankruptcy which can be reported for ten years). After that, it drops out and cannot even be considered, and you have essentially a clean slate.

Additionally, lenders are much more concerned with how you have handled your credit recently than with what happened several years ago. If you had problems in the past but have paid your bills on time since, you may qualify for a loan after as little as two or three years.

Some lenders have begun offering risk-based pricing. In other words, even if you have slightly damaged credit, you may still be able to get a loan; you’ll just pay more

Defining the Decision-Makers

If you're single, this step is easy; you will undoubtedly seek advice and counsel from friends and/or family members, but ultimately the decision will be yours.

For couples, however, it may help to discuss ahead of time how you will resolve the differences that will inevitably surface throughout the home-buying process. Clarify your expectations: every home he's ever lived in has had a workshop in the garage, and the cars have been kept outside; of course, this home will have an attached garage/workshop. She's tired of traipsing in and out of the cold to unload groceries and can't wait to have a garage for the car - and a formal dining room for entertaining.

If children are involved, the process becomes even more complicated. They will have definite opinions about what they want in a home, and their priorities are unlikely to line up with yours. You may want to leave them out of the initial phases of the search and wait to show them the last two or three homes you are considering. This way, they can have input without bogging down the process.

Determining What You Need

By this point, you should have some idea of what you can afford to spend on a home. With that in mind, you need to begin thinking about what you want and then setting some priorities. Ask yourself questions such as:

• What type of home is most appealing to you: ranch, split-level, contemporary, two-story, etc.?
• Which construction do you prefer: brick, vinyl siding, wood siding, stone, stucco, etc.?
• What kinds of activities will take place in your home on a regular basis? If one of you is a student, for example, you will need to have a quiet study area somewhere in your home. If you plan to do a lot of casual entertaining, a rec room may be important.
• How are those activities likely to change with time? How will your needs be different when the student graduates, for example?
• How long do you plan to stay in this home? Does it need to be adaptable as kids grow and needs change, or do you plan to move in five years so that flexibility is less important?
• What kind of ambiance do you want in your home? Bright and sunny? Intimate and cozy? Formal? Informal?
• How many bedrooms will you need? Bathrooms?
• Do you want a master suite?
• Do you want a separate dining room?
• Do you need a basement?
• Do you prefer a large or small lot?
• Is it important to have a garage? Does the garage need to be attached?
• Do you want a fireplace?
• How much square footage do you need?
• Do you need a fenced yard?
• Do you need to be near public transportation?

Once you've defined some of your expectations and desires, you can begin to prioritize them. Which items are negotiable and which aren't? How much flexibility do you have?

You'll also need to decide if you want to buy an existing home or build a new one. If you decide to buy, do you prefer an older home or a new one? And how, for that matter, do you define "old" and "new"? Talk with your REALTOR® about the advantages and disadvantages of each given your lifestyle.

If you decide to build, you will have two options: work with a production builder and choose from pre-determined floor plans or start from scratch and build a custom home. In either case, you will want to thoroughly investigate the builders you are considering. Be sure to look at other homes they've built, and talk with your REALTOR® for recommendations.

Building a custom home can be an arduous process. Potential pitfalls abound from zoning problems to weather delays. If you decide to build, commit yourself to

• Do the research necessary to know what you want before you begin the process. Don't pay an architect or draughtsman to draw plans for your house until he or she has walked the property with you, studied a survey with setback lines, and reviewed any neighborhood covenants and restrictions.
• Seek out and listen to expert advice. Be particularly careful about arranging payment for the builder so that he or she has incentive to finish your home in a timely manner.

Your REALTOR® can be an invaluable asset through this process.

Deciding Where to Buy

You may have heard that location is everything in real estate. For a homebuyer, location is very subjective; as with deciding what to buy, deciding where to buy is a matter of determining priorities. Is it important to you to be close to your work, your church, your extended family, or a particular school? Do you want to be near a recreational area? These factors will determine the area of town in which you choose to settle.

Ideally, you'll be able to find somewhere that meets these criteria and where property values are rising and zoning laws preserve the integrity of your neighborhood.

When you find a neighborhood you think you might want to live in, you'll need to do some research. Drive through during the day to check out the condition of the homes and infrastructure. Are lawns, homes, and streets well maintained? Are there any parks nearby? Are they well kept? Drive through after a rain. Do streets and lawns drain well? Drive through at night. Do the lights work, and are the streets well lit? Walk through some stores in the area. Do the people there seem like neighbors you would enjoy? Visit the local police station to find out about crime rates and the schools to assess their quality and desirability. Find out if property values have risen, declined or stayed the same over the last five years. Your REALTOR® can be a valuable resource in this part of the process. As you investigate the neighborhood, you'll also want to check out nearby neighborhoods; their condition may be a harbinger of things to come.

The bottom line is that you don't want to buy in an area where property values are declining. Signals that an area is on the decline include:

• An unusual number of unoccupied homes or homes for sale
• Single family homes being converted into multiple-family units
• Poorly maintained homes and infrastructure
• Increased crime often signaled by burglar bars over windows and doors, by vandalism and by graffiti
• Empty retail space

Before you buy in a new subdivision, you need to know something about the developer and the housing market in the area. Although you can't predict how the area will develop or who your neighbors will be, if you know that the developer is reputable and the demand for homes is high, you can be reasonably sure that the lots will sell quickly to a fairly economically homogenous group of people. If demand drops off, however, the developer may compromise his standards and build smaller homes or lower his profit margin to attract less qualified buyers.

The Search Process

You will probably use several resources in your search for the right home. These may include friends, the internet, community newspapers, "catalogs" from local real estate companies, and most importantly, your real estate agent.

Friends

Career counselors will tell you that networking, talking with as many people as you can about your career goals, is an important step in any job search. It's also a good idea in your search for the right home. Talk with your friends about what they like and don't like about living in the area they're in. If their neighborhood interests you, ask them to let you know when they hear of houses coming on the market. In a hot housing market, timing can be everything. If you can get into a home before the sign goes up in the yard, you've got an obvious advantage.

The Internet

The internet is an invaluable resource for homebuyers. Estimates are that anywhere from 30-50 percent of potential homebuyers will search the internet for homes before contacting a real estate agent. Searching the internet allows consumers to educate themselves about what's on the market, and how much they can expect to pay for it, at any hour of the day or night, without leaving their homes and without having to work around anyone else's schedule.

Spend some time doing what you're doing now. By visiting our Search For A Home page, you can view all of the homes listed in the Multiple Listing Service (MLS) in the Indianapolis area.

(The MLS is a cooperative effort between the real estate brokerages in a community. When an agent lists a home, he/she provides information about the listing to the organization that oversees the MLS. That organization, in turn, makes the information available to the other real estate agents in the area.)

MouseTrak

Perhaps one of the easiest ways to look for a new home is to click on the MouseTrak button on our home page. MouseTrak allows you to specify a few parameters (e.g., number of bedrooms/bathrooms, price, etc.) for homes that are of interest to you. When a home that meets your parameters is listed in the MLS, you will automatically be notified via email or fax. If you find a home that appeals to you, you can drive by for a better look at the home and the neighborhood it's in. If you're still interested, you can arrange a showing.

Be sure to include your REALTOR®'s name when you register, so that he/she will also be notified. If you're not already working with an agent, MouseTrak will assign a Tucker agent to follow up with you in a few days. He/she will be able to answer any of your questions and arrange showings for any of the homes you want to see. There is no cost for this service.

Community Newspapers

Weekends are the most popular time for real estate ads since that's when most people have time to look. Pick up a weekend edition of the paper in your area and look through the ads. If you're looking in a large metropolitan area, you might be well advised to look in a smaller, community paper rather than the large city-wide publication; advertising costs will be lower in the smaller papers and more agents will have access to them.

It may take a little time to adjust to the language and abbreviations of real estate ads. Again, your real estate agent can help with this.

Weekend papers will also have ads for open houses. This is a great way to educate yourself about what's available in your area and what you'll have to pay for it. Even if a home doesn't exactly meet the criteria you have established, you might want to visit the open house as a way of double checking your expectations. If you're working with a real estate professional, take one of his/her business cards to the open house so the agent there knows you're already working with someone else.

Real Estate Brokerage "Catalogs"

Many larger real estate companies will publish "catalogs" (or magazines) of their inventory on a regular basis. Tucker's magazine is called Tucker Talks Homes and is published monthly. It's available for free at many Marsh and Kroger grocery stores and at Union Planters banks - or from our home page by clicking on Free Color Magazine.

Alternatively, sometimes a third party will publish a catalog and sell space to local companies to advertise their listings. These publications are usually free and can be found in grocery stores or at other retailers. In Indianapolis, you can call or contact us for a copy with over 1,000 homes in full color.

Your Real Estate Agent

A good real estate agent will be your best resource to find your new home. He or she will use the MLS - and a network of professional relationships - to help you in your search. Unless you are being unrealistic in your expectations (e.g., wanting too much house for too little money), your agent should contact you regularly with updates about homes coming on the market that meet your criteria. In general, you can expect your agent to work around your schedule for visiting homes; however, you'll also want to be flexible since you've both got a lot at stake in the process.

Once you've scheduled a showing, be prompt and expect the same from your agent. He/she should have a printout of the MLS sheet for the home you've visiting. This sheet will list features of the home and provide information regarding property taxes, homeowner association fees, etc. You should bring a notebook and a camera - especially if you will be viewing several homes in a short time. This will prevent confusion later when you try to remember which feature went with which home.

If the seller or his/her agent is present as you tour the home, keep your thoughts and reactions to yourself. Don't weaken your negotiating position by letting them know how much you want the house or how much you're willing to pay for it. Don't act disinterested, but don't be overly enthusiastic. Furthermore, don't eliminate a house with a potential problem without giving some thought to how you might fix it. You are looking for the best home for your needs; you probably won't find a perfect home.

How Much Should You Offer?

While you don' have to offer the seller's asking price, if you put in a lower bid for the home and someone else makes a higher offer, you could lose it. Your REALTOR® can help you come to your decision, but ultimately the decision is yours.

You'll need to consider several factors:

• How much can you pay? It's easy to be caught up in the emotion of the moment and decide that you want the home at any price. If you buy the home, however, and later lose it because you really couldn't afford it, you'll be in much worse shape - financially and emotionally. Review the steps you took when you pre-qualified for a loan to determine what you can really afford.
• How much should you pay? Even if you can afford more than the asking price for a home, you shouldn't pay more than the home is worth; you want to be sure that someone else will pay at least what you paid for the home when it's time to sell. To determine the fair market value of the home, ask your real estate agent to search the MLS for sales of comparable homes in the area. Knowing what they sold for will give you some idea of what the market will bear. Sometimes, however, it may be difficult to find comparable sales (in a new development or in an area that's being revitalized, for example). In this case, you may want to ask for an independent appraisal, and make your offer contingent on the appraised value being in line with the sales price.
• How badly do you want this home? Other factors might influence your decision of when and how much to offer: How long have you been looking? What other viable options do you have? How quickly do you need to make a move? If any of these factors are weighing heavily in your decision, you may want to offer the list price (or more earnest money, but more about that in a moment) in order to speed up the process.

You might consider offering the full price of the home if

• You think the house is accurately priced or under-priced.
• The house is just what you have been looking for, and there are few other houses on the market that meet your needs.
• The owner does not appear to be in any hurry to sell quickly.
• The house has just come on the market and similar houses have recently sold very quickly.
• You have inspected the house thoroughly and there are no indications of problems.
• You can afford it.

Earnest Money

When you submit an offer, you must include a cash deposit, called earnest money. This deposit indicates to the seller that you are serious in your intent to purchase the home.

There is no specific required amount, but general practice says that it should be enough to discourage the buyer from defaulting, compensate the seller for taking the property off the market, and cover any expenses the seller might incur if the buyer defaults. As the buyer, on the one hand, you don't want to put all of your savings into earnest money; you'll need to save some for other expenses. On the other hand, if you really want the home and have reason to believe that the seller may receive other offers, a higher offer of earnest money might sway the seller in your direction. Talk with your real estate professional to determine a fair amount.

Earnest money is generally given to the listing agent who places it in an escrow account where it is held until the closing (or until the transaction falls through). At closing, the deposit becomes part of your down payment.

If the transaction never makes it to closing, the earnest money is either returned to you or given to the seller. You will get the deposit back if

• The seller fails to live up to the terms of the sales contract,
• An inspection reveals major defects in the home,
• You cannot obtain financing, or
• If any specific conditions in the sales contract cannot be fulfilled.

If you fail to live up to the terms of the sales contract, the seller can keep the earnest money.

The Sales Contract

An offer to purchase spells out all of the details of the transaction. If, for example, you want to be sure that the washer and dryer are included in the sales price of the home, that intention must be specified in your original offer. A verbal agreement is not enough.

An offer to purchase typically includes

• The buyer's name and statement of intent to purchase the property
• The address of the property
• The purchase price and how it is to be paid (e.g., amount of earnest money, where it will be deposited, amount of down payment, amount of mortgage, terms of the loan, etc.)
• A provision for the closing of the transaction and the transfer of possession of the property to the buyer by a specific date
• A provision for title evidence
• A provision for the completion of the contract should the property be damaged or destroyed between the time of signing and the closing date
• A statement of remedies available in the event of default
• Dated signatures of all parties
• An expiration date and time (at which point the offer will no longer be valid if the seller has not responded with either an acceptance or a counteroffer)
• All contingencies (e.g., no major defects uncovered by an inspection or title problems discovered in the title search)

It may also include

• Personal property included in the transaction (e.g., refrigerator, dining room chandelier, storage units in the garage, etc.)
• Any real property to be removed by the seller before closing (e.g., a storage shed)
• The transfer of any applicable warranties
• The identification of any leased equipment that must be transferred to the purchaser or returned to the lessor (e.g., a water softener or security system)
• Closing or settlement instructions
• The transfer or payment of any outstanding taxes or special assessments
• The buyer's right to inspect the property shortly before closing

Any offer may be revoked at any time before it has been accepted. Once the seller acknowledges acceptance of the offer by signing it, the offer to purchase becomes a valid sales contract.

Counteroffers

Just as you don't have to offer the list price for the home, neither does the seller have to accept your offer. Most home sales involve a process of offers and counteroffers until both parties are satisfied with the price.

A counteroffer is a new offer, and it voids most of the terms of the original offer. The buyer may then accept or reject the counteroffer. He/she can continue the process with another counteroffer.

During this process, your real estate agent will serve as a go-between. Be careful not to reduce your negotiating power by revealing too much (e.g., how badly you want the home, how high you are willing to go, etc.)

Like the original sales contract, all counteroffers should be submitted in writing with a specified expiration date and time. They may be revoked at any time prior to the other party's acceptance and become valid contracts when they have been signed by both parties.

Contingencies

Contingencies are additional conditions that must be satisfied before the contract is fully enforceable. They include

• The actions necessary to satisfy the contingency
• The time frame within which the actions must be performed
• Who is responsible for paying any costs involved

The most common contingencies are

• Mortgage contingency-protects the buyer's earnest money until financing can be arranged
• Inspection contingency-the buyer may request inspections for termites, lead-based paint, structural and mechanical systems, sewage systems, and radon or other toxic materials
• Survey contingency-a survey confirms lot boundaries and reveals any zoning or code violations associated with the property (e.g, is the property in a flood plain-which will require additional insurance?)
• Property sale contingency-the buyer may make the sales contract contingent on the sale of his/her current home to ensure the availability of cash for the purchase. Likewise, the seller may accept the offer contingent on their purchase of another home.

Sometimes a seller will accept an offer with contingencies but will include an escape clause. This clause permits the seller to continue to market the property until all of the buyer's contingencies have been removed. In this case, the buyer should retain the right to eliminate the contingencies if the seller receives a more favorable offer.

Understanding Mortgages

The mortgage world can look like a bowl of alphabet soup: VHA, FHA, ARM, PMI, PITI. It can be confusing and perhaps even a little unnerving. This section will give you a basic understanding of all of the initials and help you prepare for the closing table.

From a legal standpoint, a mortgage is a voluntary lien on real estate. A borrower pledges the land to the lender as security, or collateral, for the debt. In practical terms, this means that when you borrow money to buy a piece of property, you voluntarily give the lender the right to take that property (foreclose) if you fail to repay the loan.

Tax and Insurance Reserves

When you borrow money to purchase real estate, the lender has a vested interest in how well you meet other financial obligations-in addition to repaying the loan-associated with the property. For example, if you fail to pay your property taxes and then default on your loan, the government will be paid first-and the lender will lose money on your loan. Similarly, if you fail to pay the premiums on your homeowner's insurance and your home is destroyed by fire, your loan is no longer secured. For these reasons, many lenders require borrowers to provide a reserve fund to meet future real estate taxes and property insurance premiums. In Indiana this fund is called an escrow account. If your lender requires one, you will make the first deposit at your closing. It will cover any unpaid real estate taxes and a portion of the insurance premium liability. For the life of your loan, a portion of each mortgage payment will be allocated to paying off the principal, another portion will pay off interest, another portion will be escrowed for taxes, and the final portion will be escrowed for insurance. Your loan officer may refer to this as PITI: Principal, Interest, Taxes and Insurance.

Amortized Loans

The word amortize literally means "to kill off slowly, over time." Most mortgage loans are amortized, meaning they are paid off slowly, over time-typically 15 or 30 years. Each amortized loan payment partially pays off both principal and interest. Each payment is applied first to the interest owed; the balance is applied to the principal. At the end of the term, the full amount of the principal and all of the interest due is reduced to zero.

For fully amortized loans, monthly payments remain consistent throughout the life of the loan. However, because the interest is paid first, the portion applied to repayment of the principal grows and interest due declines as the unpaid balance of the loan is reduced. Borrowers who make additional payments should instruct the lender to apply the additional funds toward repayment of the principal.

Conventional Loans

Conventional loans are viewed as the most secure loans because their loan-to-value (LTV) ratios are the lowest. The borrower generally makes a 20 percent down payment and borrows the remaining 80 percent of the value of the property. This is important because lenders needs to know that if a property goes into foreclosure, they can get out of it what they have invested in it.

When making a conventional loan, the lender is relying on the appraisal of the real estate (as the only security) and on the reliability of the prospective borrower as indicated in his/her credit history. No additional guarantees or insurance is necessary.

Conventional Loans and Private Mortgage Insurance

It is possible obtain a conventional loan with a lower down payment investment under the private mortgage insurance (PMI) program. PMI allows borrowers to invest less up front while still protecting the interests of the lender. If your down payment investment is less than 20 percent of the purchase price of your home, you will be required to pay at least some PMI to provide additional security on your loan. This will generally add between 5 and 10 percent to your mortgage payment.

You will not have to pay PMI for the life of the loan, however. Once you have repaid your loan to a certain level (determined by the lender), you will be allowed to terminate your coverage.

Federal Housing Administration (FHA) Loans

FHA loans are insured by the Federal Housing Administration and must be made at FHA-approved lending institutions. As with PMI, FHA insurance provides the lender with additional security against borrower default.

Certain requirements must be met before the FHA will insure your loan:

• You will be charged a percentage of the loan as a premium for the insurance. This premium may be paid up front at closing by the borrower or by a third party. It may also be financed as part of the total loan amount or paid as monthly premium. Unlike PMI, these premium payments never stop, but if the FHA doesn't have to pay a claim, you may receive part of your money back at the end of the loan.
• FHA regulations set standards for type and construction of buildings, quality of neighborhood and credit requirements for borrowers.
• The real estate must be appraised by an approved FHA appraiser.
• The loan-to-value ratio must fall within certain limits.

FHA loans are also available for condominiums if specific requirements are met.

Veterans Affairs (VA) Loans

The Department of Veterans Affairs provides guarantees for loans for eligible veterans and their spouses. Under this program, the VA does not actually lend the money; rather, it guarantees loans made by approved institutions.

These loans are available with little or no down payments and at comparatively low interest rates.

To qualify for a VA loan, veterans must meet the following criteria:

• 90 days of active service for veterans of WWII, the Korean War, the Viet Nam war and the Persian Gulf war.
• A minimum of 181 days of active service during interconflict periods between July 26, 1947, and September 6, 1980
• Two full years of service during any peacetime period after September 7, 1980

There are limits on the amount of the loan the VA will guarantee. A lending institution may choose to extend a larger loan, but the additional funds won't be guaranteed by the VA. To determine what portion of a mortgage loan the VA will guarantee, the veteran must apply for a certificate of eligibility. The VA also issues a certificate of reasonable value (CRV) for the property being purchased. The CRV is essentially an appraisal. If the purchase price exceeds the amount cited in the CRV, the veteran must pay the difference in cash.

At closing, veterans will have to pay a loan origination fee to the lender and a funding fee to the VA. The lender may charge additional discount points which may be paid either by the seller or the veteran.

Adjustable-Rate Mortgages

An adjustable-rate mortgage will be originated at one rate of interest and then adjusted up or down during the life of the loan based on some objective economic indicator. Because the interest rate may change, the borrower's monthly payment amount may also change. Details of how and when the interest rate will be adjusted are specified in the mortgage note.

Common components of an adjustable-rate mortgage include:

• The interest rate is tied to the movement of an objective economic indicator called an index.
• The interest rate is the index rate plus a premium, called the margin.
• Rate caps limit the amount the interest rate may change. Most ARMs have two types of rate caps: periodic and aggregate. A periodic rate cap limits the amount the rate may increase at any one time. An aggregate rate cap limits the amount the rate may increase over the entire life of the loan.
• A payment cap protects the borrower by setting a maximum amount for the payments. The downside is that this can result in negative amortization where the loan balance is actually increasing over time.

Discount Points

Your lender may want to sell your loan to investors. To make the sale more attractive to the investors, the lender may charge you "discount points." A point equals one percent of the amount being borrowed. So, if you are borrowing $100,000 and the mortgage company you are considering will charge you three discount points, that's an additional $3000. Sometimes this amount is financed as part of the total loan amount, and sometimes it must be paid in cash at closing. Before you finalize your financing, be sure you understand the lender's requirements.

Prepayment

If you repay your loan before the end of the specified term, your lender will not collect as much interest/profit as anticipated. For this reason, some mortgage notes contain a prepayment clause which requires the borrower to pay a penalty on any payments made ahead of schedule. Ask potential lenders about prepayment penalties before finalizing your financing. Lenders can not charge prepayment penalties on mortgage loans insured or guaranteed by the federal government.

Home Inspections

Having just signed a sales contract on a home, you may be feeling some financial pressure, wondering how it’s all going to come together: the down payment, the closing costs, the mortgage insurance payment, the loan payment, the move-in expenses, the initial repairs, etc. In the face of this pressure, you may be tempted to skip the home inspection. Don’t. It may be vital to your personal and financial safety.

Any home is bound to have defects. Maybe the furnace was replaced just last winter. How do you know it was installed properly? Maybe the door frame that’s slanting slightly in the older home you’re planning to buy is just part of its charm—or perhaps it’s evidence that termites have hollowed out a supporting girder. What if there’s a crack in the chimney? Since the current homeowners never use the fireplace, they may not know the crack is there, but the first time you build a fire, you could be setting your roof on fire. Even if the home is brand new, are you willing to take the builder’s word that he/she did everything as promised? The potential problems are endless, and the cost of ignoring them could be astronomical.

A home inspection is essentially a visual process meant to uncover any glaring problems and help you reduce any risks you might encounter by moving into a home. A professional inspector has specific technical skills, but he/she will not take anything apart and is not licensed to make any repairs. Nevertheless, an inspection can provide grounds for a repair addendum to your sales contract and/or help you plan for future repairs. For example, if you have an inspection contingency in your sales contract and the inspection reveals that the home needs a new roof, you will have three options: ask the seller to make the repairs before you close on the home, ask the seller to compensate you for the cost of replacing the roof, or void your contract. Or, the inspection may determine that there are three layers of shingles on the roof; it doesn’t need to be replaced now, but you know that you need to budget for a new roof in a few years.

A professional inspector will examine

• Furnaces and air conditioners (within limits)
• Pilot lights
• Fuse boxes
• Main water shut-off controls
• Foundations
• Floors
• Walls and partitions
• The roof
• Windows and doors
• Your plumbing system
• The electrical system
• Energy efficiency
• Siding

Additional inspections can evaluate

• Wells and septic systems
• Swimming pools
• Water quality
• The presence of radon
• The presence of termites

If at all possible, you should arrange for the inspection at a time when you can be there to follow along and ask questions. It’s also not a bad idea for the current owner to be present; a diplomatic inspector can address the seller’s concerns was well. At the inspection, ask the inspector to return to the home with you a day or two before closing for a walk through. At that time, the expert can verify that the promised repairs were done and that no new problems have developed in the interim.

Following the inspection, the inspector will generate a report which can be used to write a repair addendum if necessary.

To find a good inspector, ask your real estate agent for referrals. Make certain that the inspector is licensed and a member of a professional organization such as the American Society of Home Inspectors (ASHI), the National Association of Home Inspectors (NAHI), or the American Inspectors Association (AIA).

The Appraisal

An appraisal is a written report comparing the condition and features of a particular property with others of a similar nature. Its purpose is to produce a professional estimate of the market value of the property. Virtually every mortgage lender requires an appraisal performed by a licensed appraiser. The property must appraise for at least the amount of the purchase price, or the lender will not extend financing. When you apply for a mortgage, your loan officer will immediately want to see a copy of your signed purchase agreement, and then he/she will order an appraisal.

The Survey

A location survey is a professional drawing showing the boundaries of the property you are purchasing. It will be required for closing unless you are purchasing a condominium or other home that does not include property. If there is any question about property lines, however, you may want to order a stake survey (where a surveyor actually comes to the property, measures, and sets stakes around the perimeter) prior to the closing. This is expensive, but it will be worth it to avoid problems later.

If a survey is required, it will be drawn by a licensed engineer and will depict the property boundaries, the location of the residence and any other improvements on the property, and the existence of any easements. (An easement grants someone else the right to use your land. Public utilities may require easements, for example, or your neighbor may have an easement on your property if his/her property would otherwise be inaccessible.)

Use the survey to be certain that you are buying all of the land you think you are buying. Look for shared or encroaching driveways and fences. With new construction, make sure that your home does not violate zoning restrictions such as set-back lines (the distance required between your home and your property boundaries).

Title Insurance

Ownership of land can be passed from one person to another in several ways. A landowner can be granted full ownership for a pre-determined period of time (e.g., his own or someone else’s lifetime); he/she can be given the land with certain conditions (e.g., no gambling can ever take place on the land, or, it must always be used for church purposes); or he/she can be granted full ownership for an indefinite amount of time, complete with the right to pass the land on to his/her heirs.

Ownership is evidenced through a document called a title, and for every piece of property there should be a consistent chain of title showing who owned the land at all times. Before your lender will extend credit for your mortgage, he/she is going to want to know the history of the title to your property. It may be that there are gaps in the chain - a period where no title seems to have existed for the land. If that’s the case, someone else could come along later, produce a valid title, and claim the land you now "own." Or, there may be a condition on the land that makes it illegal for you to have your home there. Or, the property owner thirty years ago may have defaulted on his taxes so that the government really owns the land you’re trying to buy. Obviously, you, and your lender, need to know up front exactly what you’re getting when you buy this land - if you really can buy it.

To this end, once you have a loan commitment, your lender will order a title search from a title company. (The seller pays for the search in his/her closing costs.) The title company will research public records to trace the title back 40-60 years (considered the "root" of the title). If your title is marketable - it has no serious defects, doesn’t expose you as the buyer to the possibility of future litigation, and can be transferred at your discretion - the title company will produce a certificate of title which certifies the results of the search. This does not guarantee your ownership, however; problems could still surface later.

To protect yourself against past problems that may surface sometime in the future, you will purchase a title insurance policy at your closing. This policy will protect you from

• Defects that could be found in public records
• Forged documents
• Incompetent grantors (e.g., a past title wasn’t valid because the person who conveyed wasn’t legally competent to do so)
• Incorrect marital statements, and
• Improperly delivered deeds.

Title insurance does not protect you against defects that were known at the time of your purchase and were listed in the policy.

Homeowner’s Insurance

Your mortgage company has a vested interest in making sure that you have insurance for your new home. They need to know that their investment has been safeguarded so that if your home is destroyed by fire six months after the closing, you will be able to either rebuild or repay the loan. For this reason, you will have to provide them with proof of insurance prior to your closing.

Homeowner’s policies insure your home and other structures on your property (e.g., a detached garage, shed, etc.) against loss or damage. This does not apply to structures used for business purposes (e.g., a garage used as a body shop) or rented to other parties. The policies also protect personal property in your home, although items of special value (e.g., expensive jewelry or furs) may require additional "riders" in order to be covered.

Your homeowner’s policy will also include liability insurance. If a friend falls down your stairs and breaks his leg, your liability insurance will cover the medical expenses and any legal liability you incur for bodily injury (up to the limits of the policy).

Like other insurance policies, your homeowner’s policy will have a deductible (the amount you have to pay before you insurance coverage will begin). The lower your deductible, the higher your premiums will be.

Homeowner’s insurance typically covers loss or damage caused by

• Fire or lightning
• Ice, snow or sleet
• An explosion
• Aircraft and other vehicles
• Smoke
• Wind or hail
• Theft or vandalism
• Riot or civil commotion
• Frozen or broken plumbing
• Malfunctioning heating and cooling systems
• Falling objects

Such policies generally don’t cover damage caused by

• A flood or underground water
• Earthquakes or mudslides
• Settling or deteriorating structural components
• Birds, rodents, insects or domestic animals.

Property Taxes

General real estate taxes are the taxes levied on real estate by various governmental agencies and municipalities (e.g., states, counties, cities, school districts, etc.) to fund the operations of the agency. They are "ad valorem" taxes, which means that they are based on the value of the property being taxed.

Real estate is valued for tax purposes by county or township assessors. The valuation process is called "assessment," and the property’s assessed value is generally based on the sales price of comparable properties. Property owners who feel that their assessment is too high relative to other properties may appeal to a local board of appeal. If an agreement can not be reached, the case could ultimately go to court.

Tax rates are determined by each taxing body separately. They project operating expenses for the coming year and divide the monies needed by the total assessments within their jurisdiction. A property owner’s tax bill is determined by multiplying their assessed value by the tax rate.

In most areas, homeowners receive one tax bill that incorporates all of the taxes levied by the various governmental agencies serving the property. In some cases, however, separate bills are prepared by each taxing body, and they may come at different times during the year.

Due dates for tax payments are set by statute. Taxes may be payable in two, four or twelve installments annually. In some areas, taxes are paid in advance (e.g., all of the taxes for 2001 are due in January 2001). In other areas, taxes are payable throughout the year (e.g., taxes for 2001 are paid in installments throughout 2001). In still other areas, a partial payment is due in the year of the tax with the balance due the following year (e.g., some of the taxes for 2001 are paid in 2001 and some in 2002). Your real estate agent can tell you more about the due dates for property taxes in your area.

If you fail to pay your taxes on time, you will be assessed a penalty. Each state has a statutory limit for delinquent taxes. After that limit, the government may collect the taxes by seizing your home and selling it at a tax sale.

Because your lender has a vested interest in making sure that such a sale never happens (since they would also lose a lot of money), they may want to escrow your taxes as part of your monthly mortgage payment. What this means is that they will increase your mortgage payment by the amount of taxes you will owe and set that money aside in a separate account. When the tax bill comes due, they will pay it. At the closing they may also want you to escrow some of the taxes that will be due at your next installment.

Finally, depending on how taxes are collected in your area, you may owe some of them to the seller at your closing. For example, suppose taxes in your area are paid in advance and due in November and May, and you are closing at the end of January. This means that the current homeowner paid taxes in November for four months when you will be living in the house (February to May). He may ask you to reimburse him at the closing for those taxes. That’s called "prorating," and your REALTOR^® can help you figure out exactly what you will owe.

Closing Successfully

Closing is the consummation of the real estate transaction, and your REALTOR^® will be an invaluable asset in helping you prepare for it.

The closing process varies from state to state. In Indiana, closing is done face-to-face; that is, the buyer and seller sit down at the same table to complete the sale. A face-to-face closing involves the resolution of two issues; first, the promises made in the sales contract are fulfilled, and second, the buyer’s loan is finalized, and mortgage lender disburses the loan funds. It may be conducted at the title company or lender’s office—or at some other mutually agreeable location. The following people may attend:

• The buyer
• The seller
• The REALTOR^® or broker for each party
• Attorneys for either party
• Representatives of the buyer’s lending institution, and
• A representative of the insurance company.

A representative of the lender or the title company typically presides. He/she will lead a review of an array of documents, such as the title insurance policy, surveys and other items.

When all parties are satisfied that everything is in order, the exchange is made. All pertinent documents must be recorded in the correct order to ensure continuity of title. For example, if the seller is paying off an existing loan and the buyer is obtaining a new one, the seller’s mortgage must be satisfied and recorded before the buyer’s since the buyer cannot pledge the property as security for the loan until he/she owns it.

As the buyer, you will be signing a lot of documents at your closing. These will include, but are not limited to:

• The HUD 1 or Uniform Settlement Statement. This statement is required by federal law. It adds together your loan amount and closing costs and deducts your down payment to arrive at the amount of cash you will need to close. (As a buyer, you like to be given a copy of the HUD statement at least one business day prior to your closing if all documents are available.) Itemized costs may include:

• Loan origination fee
• VA funding fee, if applicable
• Appraisal fee
• Credit report fee
• Settlement agent’s fee
• Survey fee
• Fee to record the mortgage
• Fee to record the deed
• Document preparation fees
• Tax service fee
• Flood certification fee
• Courier fees

• Prepaid items (e.g., homeowner’s insurance premium, property taxes, interest on your loan from day of closing to the end of the month)
• A survey
• A note
• A mortgage
• A Federal Truth-in-Lending Disclosure Statement
• A name affidavit
• A statement that neither your credit nor your job situation has changed since you applied for your loan
• A form to be filed with the IRS allowing you to deduct your mortgage loan interest payments
• A check for your down payment and closing costs
• Endorsement of the check for the mortgage from your lender

You may or may not take possession of the home on the day that you close; those details will have been specified in your purchase agreement. Either way, be sure to take the time to celebrate your closing—welcome to the American dream!

F. C. Tucker Company Inc.

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