Home Buyer
EDUCATION
Many people have a lot of questions as they begin the home-buying process. These educational resources have been developed by The Mills Team to provide up-to-date information about the home-buying process whether you are a first-time home buyer or a buyer who would like to brush up on the process. We hope you find this information useful, but it may not answer every question. Please don’t hesitate to contact us at The Mills Team for more information. We are here to help!
WHAT IS THE DIFFERENCE BETWEEN A REALTOR® AND A REAL ESTATE BROKER?
Every state has its own laws governing real estate licensing. There is no national license. In Indiana, brokers are required to complete 90 hours of instruction at an accredited school and pass a licensing exam. They must also complete 12 hours of continuing education each year to maintain their licenses.
In Indiana, a licensed broker who has joined the National Association of Realtors (NAR) and has pledged to adhere to the NAR code of ethics and professional standards is considered a REALTOR®.
The Mills Team has met and exceeded all of these standards.
WHO DO REALTORS® REPRESENT?
The answer to this question used to be somewhat complex, but in recent years, the laws have been simplified. Now, brokers 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 broker 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 broker (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 broker. In this situation, the broker 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 in order for the broker to act in this capacity. Acting as a limited agent does not release the broker from his/her obligation to uphold the standards mentioned above. However, the broker cannot disclose confidential information of each party, such as a buyer’s credit score or a seller’s mortgage loan balance, unless authorized to do so. The Mills Team has successfully represented many clients in limited agency transactions, and we have the skills and integrity necessary to do so.
HOW ARE REALTORS® PAID?
In order to legally represent you, real estate brokers must have you sign a buyer’s agent agreement that specifies how much the buyer is obligated to pay the buyer’s agent. This is generally a commission that is a percentage of the sale price. Additionally, many companies have a document fee or other set fee. This commission is paid at closing to the buyer’s agent.
Many buyers ask the seller to compensate their buyer’s agent in the purchase agreement in order to avoid out-of-pocket compensation expense for the buyer’s agent.
WHY SHOULD YOU WORK WITH A REALTOR® WHEN YOU BUY?
There are many compelling reasons to use a real estate broker when you buy a home:
- They have access to the Broker’s Listing Cooperating (BLC) 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 BLC 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 broker will know, for example, which items in the home need to be included in the purchase agreement. If the inspection uncovers problems, your broker will help you negotiate changes with the seller. Most real estate brokers 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.
QUESTIONS TO ASK
Choosing a lender can often feel like a daunting task. On one hand, they often seem to be all the same, while on the other, there are a myriad of differences to consider. So, how do you go about choosing the best lender for you? The Mills Team is here to help you navigate this extremely important part of the process. Here are some of the issues that buyers face with lenders:
- Are the costs fair? Some unscrupulous lenders will raise your interest rate if they feel you are naive about the process.
- Is your rate guaranteed? Some lenders offer what seem like great rates in marketing materials, and yet once you have signed up and are ready to lock your rate, the great rate “magically” disappears.
- Can they close on time? A big issue in the marketplace today that even affects many of our best-known banks and mortgage companies is their ability (or inability) to close the loan on time.
SO, WHERE SHOULD YOU GET A MORTGAGE?
Should you go to your bank or financial institution? Should you get a lender referral from your friends or co-workers who recently bought a home? Do you listen to the ads on the radio & television? Go through a special program from an employer or other affiliation?
Your best option will be a personalized referral from The Mills Team. We do not refer the same one or two lenders to every client. The Mills Team is very intentional about cultivating contacts at many different lenders and keeping abreast of their programs. We will listen to you, learn about your individual needs and refer you to the appropriate lender or lenders that we believe will best meet the unique needs of you and your family. Contact The Mills Team today to set up your personal consultation.
If you are a medical student, resident or practicing physician, be sure to visit The Mills Team’s Physician Section that contains information specific to your needs.
Before you write an offer on a home, it is best to pre-qualify for a loan. Now is the time to evaluate your lending options — not AFTER you write your purchase agreement. 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. There is nothing more disappointing than finding your dream home and realizing, too late, that you cannot afford it. In addition, having a pre-qualification letter also assures sellers that you are a serious potential buyer.
If you are a medical student, resident or practicing physician, be sure to visit The Mills Team’s Physician Section that contains information specific to your needs.
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.
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 free copy of your credit report annually from one or all of the three credit reporting agencies:
- Trans Union (www.transunion.com)
- Equifax (www.equifax.com)
- Experian (www.experian.com)
PREPARING TO GET YOUR MORTGAGE
A little bit of financial savvy combined with a little bit of preparation can help make your financing experience a successful one. The following list will suggest some things you SHOULD do and some things that you SHOULD NOT do in anticipation of applying for financing.
The best rule to follow in today’s home loan market, DON’T DO ANYTHING (at least anything new)!!! Except make your payments on time.
DO…
- Make all of your existing payments on time
- Keep originals of all paystubs, bank statements and other financial documents.
DON’T…
- Don’t go to credit repair agencies
- Don’t borrow to buy a car, furniture, or other big-ticket items
- Don’t pay off collections or charge-offs
- Don’t put large undocumented cash deposits in your accounts. If your family is helping you out, get it months before, or plan to do formal gifting.
- Don’t make any adjustments or transfers in your asset picture
- Don’t co-sign on another person’s loan or change your name and address
- Don’t consolidate debt to one or two cards, or close credit card accounts
- Don’t max out or over-charge existing credit cards
- Don’t open a new cell phone account
If your lender (the one you are actually using, not just checking out) did not instruct you to do it, you may jeopardize your chances of home ownership.
Just remember the simple tip: wait until AFTER the mortgage loan closes for any major purchases, loans, consolidations, and new accounts. All that may EVEN be easier now that you are a respected homeowner.
Contact The Mills Team today if you have questions regarding the financing process. We are here to help!
CORRECTING CREDIT PROBLEMS
Your lender (the one you’re actually using, not just checking out) is always the final authority on what steps you should take to improve your creditworthiness. The following paragraphs will give you an outline of what is on your credit report and suggestions that your lender might make to correct issues. However, we suggest that you do NOTHING until talking with a qualified lender. The Mills Team has a large lender referral network and would be happy to help with this important step. See “Choosing a Lender” on this page for more information.
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.
Most lenders have begun offering risk-based pricing. The rates you see advertised are frequently for super-premium credit scores, and what traditionally have been thought of as great credit scores can often have a slight rate increase over advertised rates. On the other hand, even if you have slightly damaged credit, you may still be able to get a loan; you’ll just pay more for it.
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.
The mortgage world can look like a bowl of alphabet soup: VA, 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.
Below is a list of the topics covered on this page. Scroll down to see more about each topic.
- Tax and Insurance Reserves
- Amortized Loans
- Conventional Loans
- Conventional Loans and Private Mortgage Insurance
- Federal Housing Administration (FHA) Loans
- Veterans Affairs (VA) Loans
- Adjustable-Rate Mortgages
- Discount Points
- Prepayment
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 need 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 & PRIVATE MORTGAGE INSURANCE
It is possible to 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. 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.
SETTING PRIORITIES
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: each member of your family will have different priorities. It will make your search much easier if you have already determined what your priorities are.
If children or pets are involved, it will certainly affect the type of spaces and location you need, and you’ll want to take their needs into consideration. We suggest you consider leaving children out of the initial phases of the search and wait to show them the last two or three homes you are considering. This way, the kids can have input without bogging down the 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.
- What lifestyle are you drawn to? Do you prefer a quiet, small town? Or would you like urban night life close by? What type of neighborhood environment do you want for your family?
- Do you want to be near a recreational area, park, or trail?
- Is it important to you to be close to your work, your church, your extended family, or a particular school?
These factors will determine the community in which you choose to settle. Ideally, you’ll be able to find a neighborhood that meets your criteria and where property values are rising and zoning laws preserve the integrity of your neighborhood.
Be sure to check out the community information on our website. When you find a neighborhood you think you might want to live in, you might consider doing some additional 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 or trails nearby? Are they well kept?
- Drive through after a rain. Do streets and lawns drain well?
- Drive through at night. Is there on-street parking available? Are the streets well lit?
The Mills Team can help you find out if property values have risen, declined or stayed the same over the last five years. As you investigate the neighborhood, you’ll also want to check out nearby neighborhoods; their condition may be an early indicator of things to come in the neighborhood you are considering. The Mills Team can be a valuable resource in learning more about Indianapolis-area neighborhoods.
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
- A high number of short-sale or bank-owned 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
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 primary 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 The Mills Team about the advantages and disadvantages of each given your lifestyle.
NEW CONSTRUCTION
Consult with The Mills Team before you buy a home or lot in a new construction subdivision. You need to know something about the builder/developer and the housing market in the area, and we can help. Although you can’t predict how the area will develop and what future property values will be, if you know that the builder/developer is reputable and the demand for homes is high, you can be reasonably sure that the lots will sell quickly. If demand drops off, however, the builder/developer may compromise their standards and build smaller homes or lower their profit margin, resulting in lower property values for all homes in the neighborhood.
We have helped many clients purchase or build new homes. Remember the builder is the seller and new home sales people work for the builder, not you. Most have no license or formal training to sell real estate, yet many of these sales people advise buyers as if they do. If you do not buy or build with their builder, they can’t help you. We can represent you with any builder. We have years of experience in purchasing new homes, and we will assist you in making good selections that will increase your appreciation and resale value. Be sure to tell the builder UP FRONT that you want to work with The Mills Team. After a simple registration process, we can get to work on your behalf!
THE SEARCH PROCESS
Today the majority of buyers use the search tools on TheMillsTeam.com to identify the properties they are most interested in seeing. Our site has some of the most advanced search technology available with great community information, all backed by our 30 years+ of experience. We also do searches personally on behalf of our clients to be certain they are not missing out on good home opportunities. You can also have listings delivered to your inbox. Visit our mt First Alerts page to sign up!
YOUR BEST RESOURCE
The Mills Team will be your best resource to find your new home. We use the BLC – and a network of professional relationships – to help you in your search. We will contact you regularly with updates about homes coming on the market that meet your criteria. We will work around your schedule for visiting homes to make it as convenient as possible
When we arrive at a scheduled showing, we will have a printout of the BLC sheet for the home you’re visiting. This sheet will list features of the home and provide information regarding property taxes, homeowner association fees, etc. We suggest you use this sheet to take notes about the homes you’re seeing – 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 broker is present as we tour the home, we suggest you keep your thoughts and reactions to yourself — we will discuss your thoughts with you after leaving the home. Commenting in front of the seller or his/her broker can weaken your negotiating position by letting them know how much you want the house or how much you’re willing to pay for it. Also bear in mind that we may be under surveillance when touring a home. 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, but we are looking for the home that’s perfect for you
While you don’t 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. The Mills Team can give you information to help you come to your decision, but ultimately the decision is yours.
You’ll need to consider several factors:
- The basis of your offer should be the market value of the home. To determine the fair market value of the home, The Mills Team will look at sales of comparable homes in the area. Knowing what those homes sold for will give you some idea of what the market value is. 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 that case, the market analysis parameters may need to be opened up in order to provide more data about recent sales in the area and make an appropriate offer. You can also rest assured that the purchase will be contingent upon an independent appraisal confirming the market value of the home.
- Other factors might influence your decision of when and how much to offer: What other home choices do you have? How quickly do you need to make a move? What is the financial impact if you can’t find a home soon? If 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 should 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 house has just come on the market and similar houses have recently sold very quickly.
The Mills Team is here to put our experience to work for you. We will help you consider every known factor in order to make the offer that is most likely to help you get the home you want at a price you’re happy with.
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 in our area is 1% of the purchase price. 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. The Mills Team will work with you to determine a fair amount.
Earnest money is generally given to the listing broker who places it in an escrow account where it is held until the closing (or until mutual release). 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 the buyer or given to the seller. You will generally 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
- 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 buyer and seller have agreed, signed the purchase agreement and all counteroffers, if any, then 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 continuation of the purchase agreement. Everything in the purchase agreement stands except for those items specifically addressed in the counteroffer. The buyer may then accept or reject the counteroffer. He/she can continue the process with another counteroffer.
During this process, The Mills Team will serve as a go-between. We are skilled negotiators, and we understand how to keep your negotiating position strong throughout the entire process. We work hard to get you the best price possible, along with protecting your interests.
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.
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. The Mills Team can recommend qualified home inspectors who will do a thorough inspection, helping protect you from unseen issues, and giving you the opportunity to request that these issues be addressed before the sale is finalized.
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
- 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, we will help you arrange for the inspection at a time when you can be there to follow along and ask questions. Following the inspection, the inspector will generate a report which The Mills Team will review with you and can be used to write a repair addendum if necessary. Once the seller has completed the agreed-upon repairs, we recommend that the inspector return to verify they have been repaired correctly.
We can help you find a qualified inspector. Our recommended inspectors are licensed and members of a professional organization such as the American Society of Home Inspectors (ASHI) or the American Inspectors Association (AIA).
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 mortgage lender will order the appraisal when you do the final application for mortgage. Please ask the lender to order your appraisal immediately, as delaying your appraisal will often delay your closing. The property must appraise for at least the amount of the purchase price, or the lender will not extend financing. In the event the property does not appraise for the amount of the purchase price, The Mills Team can help you explore your options.
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).
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 want a title search from a title company. 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 and a lender title insurance policy at your closing. These policies will protect you and the lender 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
- 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 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
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.
Due dates for tax payments are set by statute. Taxes are payable in two installments annually. If you fail to pay your taxes on time, you will be assessed a penalty.
Property taxes in the state of Indiana are paid in May and November of each year. These taxes are a year in arrears, meaning that the tax bill due in May is for the first half of the preceding year, and the November installment is for the second half of the preceding year. If a buyer were closing on April 15, the seller would be crediting to the buyer all of the taxes for the previous year and 3 1/2 months of the current year. This crediting process is called “proration.” Once the seller credits the prorated taxes to the buyer at closing, the buyer then assumes and pays all tax bills going forward.
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 is usually conducted at the title company. The following people may attend:
- The buyer
- The seller
- The REALTOR® or broker for each party
- Representatives of the buyer’s lending institution, and
- A representative of the insurance company
A representative of the title company typically presides over 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 ALTA 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 should be given a copy of the ALTA statement prior to your closing). 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
Things you will need to bring to closing include:
- A government-issued ID, such as driver’s license or passport
- Any funds you need for closing, such as down payment and/or closing costs.
In the state of Indiana, all funds for closing over $500 must be in the form of a cashier’s check or wire, and all funds over $10,000 must be wired. Contact The Mills Team for wiring instructions for your closing.
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 and welcome to the American dream!
STEP 1: FIND A REALTOR®
Before you start your home search, it is important to find a buyer’s agent that will be looking out for your best interests so you don’t fall into a money pit or end up paying too much for your new home. A good buyer’s agent will help guide you through the home buying process and can also save you TONS of time and money on the road to your new home. Buyer’s agents are legally bound to help buyers, whereas listing agents—the real estate agent representing the home listing—have a fiduciary duty to the home seller. Your buyer’s agent will also set up home tours, give you insight on any homes you like that you may not be aware of, have knowledge of upcoming listings not yet on the market, help you negotiate the best terms, protect your part in the deal, and give you invaluable advice throughout the process.
STEP 2: GET PRE-APPROVED
The Mills Team has many contacts in the world and can refer you to excellent lenders that fit their needs. Different banks and companies will offer different loan fees and by shopping around you can oftentimes save yourself a lot of money. Get multiple quotes so you can make sure you get the best rate and terms. Be sure to also check your loan officer’s website for testimonials and information. A good loan officer will offer you many online resources and tools. Before you lock in your rate, be sure to check the daily rate with the rate your loan officer gives you to ensure you are getting the lowest rate possible. Interest rates will determine how much a mortgage will cost each month and come in fixed or adjustable terms. Mortgage lengths can range from 15 years to 30 years. The longer the repayment term, the lower the payments will be. However, the interest accrued will also be higher on a longer loan. Don’t forget to ask for a pre-approval letter so you can include this with any offers you make.
STEP 3: DETERMINE HOW MUCH YOU CAN AFFORD
Before the house hunting process begins, it is important to know how much you can afford. Expenses to consider include the down payment, monthly expenses, property taxes, and any home insurance costs. These will all have to be considered before the home buying process begins as they are typically included in your new monthly payment. Since a person’s credit score determines their interest rate, knowing your score ahead of time can help you decide if now is a good time to buy or not. An individual’s debt-to-income ratio must also fall within acceptable limits of the home’s cost. Once you have determined these things, and if you feel that your budget has enough room to afford a new home, then it’s time to look for the right loan.
STEP 4: START SEARCHING
Start your home search by using your agent’s website (like this one!) to search the BLC for homes (in the Indianapolis area, the BLC is similar to the MLS). Agents have a direct line to the BLC, so their websites often update with the newest properties faster than the ‘big name’ sites out there. It also has a My Listing Manager tool that keeps you both in the loop. You can start your search and begin saving your favorite properties to your account and even set up alerts to get new homes and price changes emailed to you. Your agent can then see the properties you have liked and can send potential new properties directly into your listing manager that they think you may be interested in. It’s a WIN-WIN!
STEP 5: MAKE AN OFFER & NEGOTIATE
There is an art to making an offer on a home. Your buyer’s agent will help you choose the right terms for your offer and will be watching for signs of problems in the home. Listen closely and be sure to ask questions. Be sure to ask for an inspection contingency so if there are major problems, you can back out of the deal without losing your earnest money. You want to make sure all of your bases are covered. That’s where having a buyer’s agent is most valuable: so your rights and interests are protected. With their experience on your side, they will be able to help you negotiate a lower price that sometimes includes concessions or closing costs. Their job is to protect YOU in the contract.
STEP 6: HOME INSPECTIONS & APPRAISAL
Once your offer has been accepted, you will need a home appraisal. Banks require this so they can make sure the home is worth as much money as they are lending you. You may also need some inspections depending on your loan type. FHA and VA loans have more requirements than conventional loans. This is also the time to have a full home inspection, even if it is not required. A home inspector will go through the home and specifically look for problems and provide you with a full report on everything they find. This will give you the opportunity to avoid major problems and negotiate repairs without losing your earnest money.
STEP 7: ASK FOR REPAIRS OR DISCOUNTS
Once the inspections are done, you will more than likely ask the seller to fix some of the issues you found. Keep in mind that they are only required to fix something if the loan terms require it. Be reasonable but firm in your requests. If your seller rejects your request, then it is up to you to decide how to proceed.
STEP 8: FINAL WALK-THROUGH
The final walk-through is an important last step, even if you are positive you are going to go through with the sale. Walk through and check the agreed upon repairs, make sure everything is in working order and new issues have not popped up. If everything looks good, then it’s time to go to closing!
STEP 9: CLOSING
Before the home is legally transferred to you, the closing process must occur. During this phase, you will sign all of the mortgage documents, pay closing costs, and sign various other legal documents. Your buyer’s agent will be at the closing with you to help you through it all. Once all of the papers are signed and monies are transferred, the keys to your new home are yours! The only thing left to do is move into your beautiful new home. This may occur immediately after the closing or at the date set in the closing documents.
STEP 10: MOVE IN
Depending on how far you’re moving or how much stuff you have, you may require a moving company or a moving truck. Professional movers may seem pricey at first, but when you look at the time and money to get similar results, you may re-consider. Call and set your moving date and start packing! Many places like U-HAUL sell moving boxes that are made to make your move easier. Label everything with what is inside it and what room it goes in. Recruit friends and family if needed.
Bonus Buyer Tips
TIP #1
TIP #2
Obtain a home warranty.
TIP #3
Plan ahead by researching local movers and asking how much time in advance they need to be notified and how booked up they are now.
TIP #4
Start packing early. Pack away things you can live without and label boxes with what is inside and what room they go in.
