Happy New Year!

4 Steps To Hiring A Qualified Contractor

If you own your home, you understand the advantages of do-it-yourself projects. You can do things your way, on your schedule, with the materials you select. You have the sense of pride that comes with completing a project with your own two hands. And of course, you can save some money at the same time.

But doing it yourself isn't always an option. Some projects are too big, too time-consuming or simply beyond your comfort level. When that happens, it's time to hire a contractor to get the job done. Which leads to one of the most common questions I get from readers:

"What's the secret to dealing with a contractor?"

Know what you want before you start

Before you ever start thinking about calling a contractor, you need to know what you want. That sounds pretty obvious, but surprisingly enough, most people simply don't have a very good grasp of what they want to have done. And if you don't know what you want, then the contractor certainly won't. That will lead to misunderstandings, disagreements, and ultimately to disappointment.

Determine as much as you can about your project. Look through magazines, take a home tour, go to the library, and walk through a home center. The more details you have ready for the contractor, from the sizes of rooms and their intended use to the types of windows and appliances and trim you want, the better the contractors will understand your vision. That will greatly improve communication, as well as your chances of getting the finished product you're hoping for.

Who does that type of work

Different contractors have different specialties. You can save yourself some time and ultimately some money if you understand the type of contractor you're looking for. If you want a contractor to repair your fire-damaged home, look for someone who specializes in fire damage, not a firm that only builds new houses.

There also are times when you need a general contractor, and times when you need a specialty contractor. A general contractor oversees several trades on a project. For example, if you want to have a room addition built, you would use a general contractor, rather than hiring five -10 individual specialty contractors and trying to coordinate each one. On the other hand, if you want to have a new heating system installed, you'd typically hire a heating and air conditioning contractor to handle that.

Referrals

Now that you know what you want to have done and who you need to do it, you need to find the right company. The single best way to do that is through a personal referral from someone you know and trust.

If you know anyone who's had work done on their home that they were happy with, that's usually the ideal place to begin. Talk to them, and get some feedback about the contractor's skills, pricing, on-time performance, crew and subcontractor performance, general cooperation, and anything else you can learn.

There are other sources of referrals as well. Maybe you've seen a plumber's van or an electrician's truck at your neighbor's house. Perhaps you drive by a room addition every day on your way to work. Stop and introduce yourself, and talk to the homeowner. As long as you're not asking a lot of personal questions, especially financial ones, most people are more than willing to share their experiences. You'll usually get some great first-hand information about the contractor, both good and bad.

Material suppliers also are great sources. Ask the people where you buy your lumber or your plumbing supplies if they know of anyone who's particularly good at the type of project you have in mind. Like contractors, retailers have a reputation to protect. They want to keep you happy and coming back as a customer, so they'll typically refer only those contractors they know are honest and will do a good job.

The initial call

Except for small projects, I always encourage people to talk to at least two different contractors. It gives them a comparison of different perspectives, different personalities, and different price structures. When you have your names, call the contractors. But before setting up an appointment for a site visit, ask the following four questions:

1. Do they do the specific type of work you're looking for? It could be they no longer do kitchens or room additions, or they now do fire damage work and have stopped doing remodeling. Clarify that up front.

2. What's their schedule like? If you have a project that has to be done within the next month and the contractor can't even start until then, there's no point in wasting your time or theirs.

3. Can they provide you with referrals? Most companies are more than willing to provide you with names and phone numbers of past clients. If they can't or won't provide you with referrals, don't hire them! Between the time you call the contractor and the time they come out to your home, be sure to follow up on a couple of the referrals and get some feedback from the homeowners. For larger projects, ask if you can come out and view the contractor's work.

4. What is their business name and license number? Get the contractor's full business name, address, and business phone number, as well as their contractor's license number. Immediately call the proper state or local licensing agency to verify the status of the license and that any required bonds and insurance policies are in place. If there are any problems with the contractor's license, bond, or insurance, do not deal with that contractor!

Happy Holidays!

4 Common Real Estate Deal Killers

Recently, the sellers of an architect-designed home in the hills above Oakland, Calif., received two offers in less than two weeks. They accepted the offer from the buyers who seemed most committed to buying the house.

In less than 12 hours, the buyers backed out. Although they had been looking for a home for months and thought they'd decided where they wanted to live, they had a change of heart -- not about the house, but about the location. Buyer's remorse is one reason transactions fail.

The enthusiasm that permeated the home-sale market when the federal tax credits were available has waned. Economic news has been mixed at best. This has led to an increased reticence on the part of some home buyers.

HOUSE HUNTING TIP: 

An easily avoidable reason why contracts fail is failure of sellers to disclose a significant defect in the property before the buyers make an offer. Some sellers resist having presale inspections done because they don't want buyers to know too much about what's wrong with their home until they fall in love with it.

This strategy might work for sellers in a hot market where prices are rising quickly. However, in today's market, buyers are diligent and cautious; falling in love takes a back seat to practicality.

In one case, sellers withheld a report that revealed significant foundation problems that could be fixed only at great expense. The buyers, who were buying at the top of their price range, were furious. 

They wouldn't have made an offer had they known about the foundation upfront, particularly since the seller was unwilling to correct the defect. They wasted time and money on their own inspections. The deal fell apart and the sellers had to put the house back on the market.

Often contacts are so loaded with conditions unacceptable to the sellers that they don't make it to first base.

One seller refused to respond to an offer because the price was very low, the offer was contingent on the sale of the buyers' home that was not yet on the market, and the buyers wanted the sellers to take their home off the market until the buyers found a buyer for their home.

Another culprit that can rattle a transaction, even one that's not full of unreasonable contingencies, are conditions pertaining to the buyers' financing. Well-qualified buyers were recently told by their lender that they had to increase their cash downpayment from 20 to 25 percent because of one late payment on their credit report.

The buyers had enough cash to increase their downpayment. But, when defects were pointed out during inspections, the buyers didn't have enough cash left to make the repairs. They asked the seller to credit them money at closing. The seller agreed and the sale closed. However, this could have blown the deal if the seller was unwilling or unable to pay for repairs.

Low appraisals also have been a factor in keeping transactions from closing. The situation has improved recently due to a lift in home-sale activity, however, following the expiration of the federal tax credit on April 30, the NATIONAL ASSOCIATION OF REALTORS® reported a decline in pending sales -- accepted offers that have not yet closed.. 

If pending sales continue to decline, this could have a negative impact on home prices, which could lead to more low appraisals. Lenders want appraisers to use comparable sales that occurred within the last three months. 

Keep in mind that the home-sale market is a local business. Although national trends and consumer confidence impact local markets, prices tend to hold up well for well-priced homes in high-demand, low-inventory neighborhoods.

Common Contingency Hangups

Recently, buyers removed the loan contingency after the lender's underwriter told their mortgage broker that the loan was approved. Soon after removing the contingency, the buyers found out that the lender required a second appraisal before the loan would be funded.

The buyers' deposit was at risk if a second appraisal came in at a lower value than the purchase price and the buyers were unable to close the sale, even though the first appraisal was approved by the lender.

This, unfortunately, is not an isolated incident. All too often, underwriters grant buyers' loan approval and then ask that additional conditions be met before the buyers' loan documents are issued. For example, an underwriter might want first-time buyers to provide verification that they made their rent payments on time.

As long as the conditions are satisfied, the transaction closes -- but delays are common.

Buyers should include a financing contingency in their purchase offer for lender approval of their creditworthiness and of the property appraisal. Some contracts specify a time period for this contingency to be satisfied, such as 14 to 30 days from acceptance. 

Other contracts state that the financing contingency remains in effect until the buyers' lender funds the loan. Lenders don't fund until all conditions for loan approval have been satisfied. So from the buyers' standpoint, this is the safest alternative.

A financing contingency that runs until the buyers' mortgage is funded poses logistical problems for both buyers and sellers. Most sellers don't want to move out of their home until they're sure the sale will close, or until it has closed. Lenders usually don't fund earlier than the business day before closing. So the parties often don't know until the last minute when they'll move.

It's not much different with a financing contingency that has a deadline that falls a week or more before the closing date if the lender requests more information from the buyers at the last minute, which the lenders often do. Buying and selling in today's rigorous financing environment requires patience and flexibility on the part of all involved.

HOUSE HUNTING TIP: Buyers who need to remove a financing contingency by a certain date should ask the sellers for an extension if their lender grants loan approval subject to conditions that the buyers aren't certain they can satisfy, like a second appraisal.

Most sellers would grant an extension rather than put the house back on the market if all other contract contingencies have been satisfied.

Contingency-free offers are showing up in some high-demand niche markets, reminiscent of the recent bubble market where buyers made offers with no contingencies for financing, appraisal, or inspections in order to outcompete other buyers in a multiple-offer situation. 

This is risky, particularly if the sellers haven't provided a complete disclosure package before an offer is written that includes a home inspection report, wood-destroying pest ("termite") report, and any additional inspections recommended in the home and pest reports, such as for roof, engineer, or drainage evaluations.

Recently, there were six offers on a desirable listing in Piedmont, Calif. Two included no contingencies. The only presale inspection report made available to buyers was a "termite" report.

Although there was no financing contingency in the contract the sellers chose to accept, the buyers needed to qualify for a mortgage and the property needed to be appraised for the sale to go through. It was not an all-cash offer.

The sellers had the good sense to add a short inspection contingency and a financing contingency to the contract. They weren't worried about the buyers' financial capabilities or the house appraising for the purchase price. The buyers found defects when they inspected the property, but nothing they couldn't live with.Both buyers and sellers benefited from including the contingencies.

Agent Communication

Happy Hannukah! חנוכה שמחה

Winning Open House Strategies

Public open houses have been a mainstay of the home-sale market for decades. During the peak market years, buyers often wandered through an open house and bought it, even though they had no intention of buying. Impulsive homebuying is rare today.

Open houses still can be used effectively to draw prospective buyers to your home. To eliminate open houses from your marketing strategy because you find them inconvenient or risky could be a mistake.

On the other hand, you can overuse open houses and generate a negative image about your home. Too many open houses can cause the listing to become shopworn.

Some sellers have homes that are not prime candidates for open houses. These are usually high-end properties that might be vulnerable to theft. They should be shown to qualified prospective buyers by appointment only. Most listings do not fall into this category, although all sellers should keep valuables out of sight while their homes are on the market.

HOUSE HUNTING TIPS: For most sellers it's a good idea to develop an open-house strategy that will maximize exposure to your property without overexposing the property to the market. It's usually wise to have a Sunday open house the first week a listing is on the market.

This is when your home is most marketable. Serious buyers, who've already seen all current listings that might work for them, wait for new listings to come up and want to see them as soon as possible. 

A public open house gives buyers an opportunity to look without having to wait to make an appointment with their agent. Often, they have already seen photos of the listing online that look appealing.

A public open house isn't the best way for buyers to see listings that catch their eye because it may be packed with other buyers and neighbors who are curious about current home values. But, at least buyers can determine if the home is interesting enough to schedule an appointment to return for a private showing with their agent.

How often you have your house held open depends on current market conditions in your local market area. If it's taking months for homes to sell, you may want to consider having your home held open to the public every two or three weeks after the initial one or two open houses, when there ought to be high demand if your home is in a desirable location, in good condition, and priced right for the market.

Sellers often wonder if their home should continue to be held open after an offer has been accepted. This depends on whether the sale is contingent upon the sale of the buyers' home. If so, you should consider having open houses until the buyers have an accepted offer on their home.

Your contract should include a release clause that entitles you to accept other offers and be released from the contingent sale offer if those buyers haven't sold their home.

Continuing to have open houses after you have accepted an offer that is not contingent on the sale of another property can annoy prospective buyers who are under the impression that the listing is for sale. The word goes out that the home is open even though it has sold.

This can boomerang if the sale falls apart and you have to put your house back on the market. It's difficult to rekindle enthusiasm about the listing if it has been open every week even though it was pending. It's better if the contract is not contingent on another home selling to hold off on open houses so a new Sunday open house will have a positive impact if the deal falls apart.

A Simple Guide To Home Seller Disclosures

How would you like to find out after you've closed and moved into your new home that the basement is rat-infested? 

You call a local pest company and discover that the sellers hired the company to treat the house for rat intrusion.

Pest infestation might not be a material fact to all buyers. A material fact is one that would affect whether or not buyers would buy a property or the price they'd be willing to pay.

However, most buyers would be annoyed at the least that the sellers hadn't informed them in advance that the property had a condition that required routine maintenance. It could also make the buyers suspicious that the sellers may have withheld other information.

Home-seller disclosure laws vary from state to state, although most states require disclosure of material facts. Check with your real estate broker or attorney for information about disclosure requirements before you put your home on the market.

Sellers often fear that if they disclose too much, buyers won't buy their home. Generally, the opposite is the case. Buyers appreciate knowing as much about a property as possible before they close the sale.

When buyers discover conditions affecting the property that they didn't know before closing -- ones that the sellers had to have known about -- they could use legal channels to remedy the situation.

The goal in selling your home should be to sell for the highest price possible in the current market, and to keep as much of the proceeds as you can. Getting involved in a claim, mediation, arbitration or lawsuit over lack of disclosure or concealment can be time-consuming, stressful and very expensive. 

In today's environment of economic uncertainty, buyers who feel they were duped are more likely to pursue a claim against less-than-forthright sellers than they might have when home prices were appreciating at such a fast clip that it was often easier to fix the problem themselves than get into a legal battle with the sellers.

HOUSE HUNTING TIP: Here's a guideline to help you decide what should be disclosed. If you're asking yourself whether something should be disclosed, it's probably material to someone, so disclose it. Keep in mind that it's often not clear whether a fact is material. There's a certain amount of subjectivity involved.

For example, a woman was raped in a home in a trendy area of Oakland, Calif. This happened before the current owners bought the house. To err on the safe side, the current sellers disclosed this fact, figuring that it might be significant to someone interested in the property.

It was also common knowledge in the neighborhood that the event had occurred. If the sellers hadn't disclosed it, the buyers would surely have found out about it later.

A single woman who was interested in the house decided not to buy. The house had a detached garage, which gave her cause for concern even before she learned about the crime that occurred at the property. Another buyer had no concern at all about the past incident. The house sold. There was no discount in price due to the disclosure.

It takes time to make complete and accurate disclosures. Some sellers take their disclosure obligations less than seriously. It's foolish to shortchange yourself, literally, by failing to make accurate and forthcoming disclosures about property defects. It could significantly affect your net proceeds.

The burden of disclosure doesn't rest entirely on the sellers. Real estate agents are required to disclosure material facts. And buyers have a responsibility to protect themselves by thoroughly inspecting the property before deciding to proceed. 

A well-inspected property, complete with sellers disclosures, protects all parties involved.

Home Inscpection: Don't Buy Without It

Easton v. Strassburger, a landmark California lawsuit in 1984, changed the way residential housing defects were dealt with when a home is sold. Before the Easton case, the credo was buyer beware. Today, few buyers would consider buying a home without first having it inspected by a competent home inspector.

Since 1984, California real estate agents have been required to disclose known defects to a buyer, as well as defects they could have known about by using reasonable due diligence. Many other states have followed suit and require real estate agents to disclose material defects.

Even though the law favors the buyer in disclosure disputes, buyers can reasonably be expected to protect themselves by having qualified professionals inspect the property before they buy it.

The home inspection business came alive in the 1980s in order for buyers, sellers and agents to competently deal with disclosing property defects. Texas was the first state to license home inspectors. In many states, including California, home inspectors are not required to be licensed.

There are, however, two major home inspection industry trade associations that require their members to comply with a certain standard of care. They are the American Society of Home Inspectors (ASHI) and the National Association of Home Inspectors (NAHI). States also have trade organizations, like the California Real Estate Home Inspector Association (CREIA).

HOUSE HUNTING TIP: In order to make sure that you get a thorough home inspection, use the best home inspector you can find in your area. Your real estate agent can give you recommendations. It's also a good idea to ask recent buyers in your area who they used for a home inspection. Find out if they were satisfied with the inspection. Or, did they later discover problems that were missed?

It's important that buyers be present for the inspection. A home inspection can take several hours depending on the age and size of the house. If you can't attend the entire inspection, plan to show up at the end of the inspection. This way you can walk through the property with the inspector for a recap of the findings.

Keep in mind that home inspectors aren't hired to comment on aesthetical issues. It's the home inspector's job to point out defects. All homes have defects, even new ones.

What you need to know before you go through with a purchase is (1) the seriousness of the defect; (2) how much it will cost to repair; and (3) how soon it needs to be done. Ask the inspector to prioritize the findings so that you can evaluate the cost consequences.

Your goal is to have a complete inspection report on the property. In order for this to happen, your agent should ask the listing agent to make sure that the sellers provide easy access to attic and crawl spaces. Also, the utilities need to be turned on. 

Also, request that the sellers and their agent not attend the inspection. This way you can talk freely with your inspector. If it's inconvenient for sellers to leave, reschedule the appointment.

The home inspection should cover the major systems from roof to foundation and everything in between. However, home inspectors usually aren't licensed wood-destroying pest inspectors. The report will be limited to what is visible. It probably won't cover environmental hazards or irrigation systems, spas, swimming pools, septic systems and other components that should be inspected.

For this reason, it's a good idea to start the inspection process as soon as possible after you have an accepted offer. The home inspector might recommend further inspections of systems that he inspects, like the furnace.Don't make the mistake of ignoring an inspector's recommendation for a further inspection. It could lead to serious trouble later.

Finding the right stager

Buyers in some areas complain about walking into an open house and finding dirty laundry in bedrooms. 

In places like the San Francisco Bay Area, so many listings are well presented for sale that sellers who don't stage their homes are at a disadvantage.

Occasionally, a home shows beautifully as is and needs little work to get it ready to sell. 

A listing in the hills above Oakland, Calif., came on the market last year without the aid of a professional stager and sold for the asking price within a week. The house had just been renovated and the sellers had great taste. Their furnishings and paint colors were perfect for the house.

Most sellers need to put more effort into preparing their homes for sale if they want to sell successfully. Some of this work can be done on their own, like decluttering, painting and sprucing up the yard, if they have the skills, time, and are so inclined.
Many sellers will benefit from hiring a stager, which is a decorator who specializes in preparing homes for sale. Finding the right stager is important. You want to hire someone who will give your home a look that will sell it for the highest price possible.

HOUSE HUNTING TIP: One way to get familiar with different stagers' work and style is to visit Sunday open houses. Usually stagers display their business cards at the property. If not, ask the agent holding the house open if it was staged. If so, ask for the stager's name.

Most professional stagers have Web sites where you can find out more about them and preview samples of past staging jobs. Your real estate agent is a good resource. Some real estate agents have a favorite stager. If your agent has had success working with that stager, that could be an obvious choice. You're looking for results. A stager who has a good track record in your area is someone to seriously consider.

If you live in an area where staging is not popular, ask your agent for the name of an interior decorator to consult with about how best to arrange your furniture and artwork. Make sure, before you pay for a consultation, that this person also can select colors for you if your home needs painting. 

Some sellers talk to several stagers before deciding on one. Each stager should meet with you at the property. Try to arrange for your agent to attend the meeting to give input on how the house should be staged to appeal to the most buyers. For example, should a bonus room be staged as a den or home office?

Find out if the stager can use some of your personal possessions -- those that are appropriate for selling the house. The staging cost should be less if the stager doesn't have to bring in as much furniture and accessories. Ask if the stager will select paint colors. If not, there might be an additional cost for hiring a colorist.

A stager should provide you with a written proposal, including the scope and price of the job, the term of the contract, and the cost to extend, if you need it. In this market, it could take months to sell your home. Staging contracts usually run for two to three months from the date the house is staged. Extensions are usually 10 percent to 25 percent of the original fee for each additional month.

Deciding who should stage your home shouldn't be based on price alone. A cheap look is not going to generate an enthusiastic response. Go with the best stager you can afford.You want your home to look amazingly good so that it creates a buzz among buyers and their agents.

       

 

Staging Your Home For A Successful Sale

If you're selling your home, you obviously want to get it sold quickly and for the highest amount possible. One very important strategy to keep in mind is staging, which is simply the process of arranging the inside of your home so that it shows off to its full potential.

Staging plays up your home's good features, such as enhancing a great view or drawing the buyer's eye to some spectacular wood floors. It also helps to minimize some of the home's drawbacks, such as making a small bedroom look larger. But also understand that staging does not in any way mean concealing structural defects, such as hanging a picture over a water stain or putting curtains over a broken window!

Staging allows a potential buyer to visualize what can be done with the home, which is especially important with a house that's currently vacant. For example, some carefully arranged furniture in a room that would otherwise be empty can really help the buyer see the room's potential. And if you're in a neighborhood of tract houses that all look pretty much the same inside, good staging will set your home apart from the others for sale in the neighborhood.

Finally, good staging makes buyers feel at home. It lets them really imagine themselves in the kitchen with friends, or relaxing in front of the living room fire, or even working on their car in the garage.

Remove Clutter

There are several things that go into staging a home for sale, and probably the single most important one is getting rid of all the clutter. No one wants to see several days' worth of mail and newspapers on the kitchen counter, or a kid's bedroom crammed with toys and games. The same applies to the garage, basement and even the backyard storage shed.

Clutter is not just an overflowing magazine rack. It can be too many pictures on the wall, too many chairs wedged around the dining room table, or an oversized sofa that blocks the living room traffic patterns. It can be too many items of clothing crammed into a closet, or too many of grandma's dishes filling up every inch of a kitchen cabinet.

When decluttering the house, stuffing everything into the closet or in boxes in the garage is not the answer. Remember that a potential buyer is looking in every nook and cranny of the house, and an overflowing closet doesn't make much of an impression. Instead, get the clutter completely out of the house. This could be a garage sale, some donations to a local charity, or simply a trip to the landfill. If you still have items that are cluttering up the house but they are things you'll want for your next home, then rent a temporary storage space and move them there.

Let Buyers Envision Themselves There

In addition to removing the clutter to make the rooms feel more open and the closets and cabinets feel more spacious, you want to always have an eye on what things you can do to help the buyers visualize living there. For example, lots of family photos on the wall will make it hard for the buyers not to feel like they're trespassing in someone else's home.

Likewise, while you may be very proud of your religious affiliations, your choice of political ideologies, or your gun collection and the elk head on the wall, remember that not everyone shares your interests. If you can depersonalize the home to some degree, it will make it easier for potential buyers to see themselves making a life there.

Your home should also be absolutely immaculate when you have it on the market for sale. Clean the counters and the cabinets and the fixtures and the flooring and every other part of the house until it shines. Wash the windows, let in the light, and make sure that beautiful view or that inviting backyard is clearly visible when a buyer walks through. A clean house also gives potential buyers more confidence that the structure of the house has been properly maintained and cared for as well.

Hire a professional stager

It often makes good financial sense to hire a professional to do the staging for you. A professional home staging company will thoroughly understand the concepts of space and light and color, and they know how to make rooms show off to their full potential. They also don't have the same personal attachment to the home and its furnishings that you do, so they can make practical, impartial suggestions that you might otherwise overlook or simply not want to face.
The cost of professional staging varies with the size of the house and amount of work involved, but a well-staged home should sell quicker and for more money, which makes that upfront expense a wise financial investment.

       

 

Selecting the Right Mortgage

Selecting the type of mortgage that will best suit your needs is not a simple undertaking. The right mortgage will depend on many different factors, including your financial situation and how you expect it to change in the future, how long you'd like to keep your house, and how comfortable you are with the possibility of your mortgage payment changing.

For example, a 15-year fixed-rate mortgage can save you thousands of dollars in interest payments over the entire term of the loan, but your monthly payments will be greater. With an adjustable-rate mortgage, you may start with a lower monthly payment than a fixed-rate mortgage -- but your payments could increase when the interest rate changes.

The best way to find the right mortgage for you is to discuss your finances, plans and preferences with a mortgage professional, whom your REALTOR® can recommend.

Fixed-Rate Mortgages

Fixed-rate mortgages, the most common type of mortgage, offer consistently stable monthly payments. Your property taxes and homeowner's insurance may increase, but your monthly payments typically won't fluctuate.

With fixed-rate mortgages, you have the option of choosing a 30-year, 20-year, 15-year or 10-year repayment plan. You also may shorten the loan through a biweekly mortgage, thereby allowing you to make the equivalent of an extra month's payment per year. In selecting the length of your repayment, remember that a shorter loan carries higher payments but accrues less interest and allows you to build equity quicker.

Adjustable-Rate Mortgages

The interest rate on an adjustable-rate mortgage (ARM) is dictated by changing market rates. When interest rates rise, your monthly payments will go up, and when interest rates decrease, your monthly payments will go down accordingly.

ARMs often provide a lower initial interest rate than fixed-rate mortgages, attracting people who need lower payments early in the loan in order to qualify for a mortgage. ARMs also can benefit people who plan to move or refinance in the near future or those who expect their incomes to increase in the coming years.

Before applying for an ARM, find out how high your monthly payments can go throughout the life of the loan. An ARM includes two caps or limits on interest rate increases; one cap states the boundary for how high your interest rate can go up during each adjustment period, and the other cap sets the maximum total amount of all interest adjustments over the entire term of the mortgage.

The rates of an ARM typically change once or twice a year, and there is usually a lifetime cap on both the individual rate adjustments and the total amount the rate can change over the life of the loan. By applying the terms of the caps to your mortgage payments, you can anticipate the worst-case scenario prior to applying and determine if this figure is in line with your finances.

Reverse Mortgages

A reverse mortgage is a special type of loan made to senior homeowners that allows them to convert the equity in their homes to cash for living expenses, home improvements, in-home health care, or other needs.

A reverse mortgage takes its name from its reversed payment system. Instead of monthly payments by the borrower to the lender, the lender makes monthly payments to the borrower. With a reverse mortgage, older homeowners can stay in their homes and maintain or improve their standard of living without taking on a monthly mortgage payment.

To obtain a reverse mortgage, you must meet certain criteria that differ greatly from the qualification requirements for other mortgages. Reverse mortgages are generally limited to borrowers 62 years or older who own their own homes either outright or nearly so. Homes also must be clear of tax liens. And, unlike other mortgages, seniors don't have to meet income or credit requirements to qualify for a reverse mortgage.

Borrowers typically have the option of receiving the reverse mortgage's proceeds in the form of a lump-sum payment, fixed monthly payments for life, or a line of credit. A reverse mortgage's interest rate is usually an adjustable rate that fluctuates monthly or yearly. However, the size of monthly payments that borrowers receive doesn't change.

Balloon Mortgages

Balloon loans are short-term mortgages with some of the features of a fixed-rate mortgage, like low interest rates, but without the benefit of full amortization. As opposed to a 30-year fixed-rate mortgage, balloon loan payments only cover part of what you've borrowed during the term of the loan. At the end of the term, you're required to pay off the loan's balance by refinancing or making a lump-sum payment.

Balloon mortgages are typically five-, seven- or 10-year loans, so they can be beneficial to borrowers who anticipate selling or refinancing their homes in a short period of time.

Many companies offer a conversion feature at the end of the loan's term. For example, the loan may convert to a 30-year fixed loan at the 30-year market rate plus a certain percentage point. To qualify for a conversion, you usually need to be in good standing with the payments on your balloon loan. Balloon mortgage programs with conversion options are also called a 7/23 convertibles or 5/25 convertibles.

Buy-down Mortgages

Today's mortgage lenders have developed variations on the old buy-down method of offering an interest rate that is 2 percent below the fixed rate for the first year and 1 percent below the fixed rate for the second year, followed by 28 years of paying the regular fixed rate. Buy-downs now charge higher interest in the beginning of the loan to cover the future yields.

For example, if the current market rate for a fixed-rate loan is 8.5 percent at a cost of 1.5 points, the buy-down gives the borrower a first-year rate of 6.5 percent, a second-year rate of 7.5 percent and a third- through 30thyear rate of 8.5 percent. The cost would be 4.5 points.

Location Efficient Mortgages

Location Effecient Mortgages are available through a partnership between Fannie Mae and private lenders for homebuyers in select communities nationwide. In California, LEMs are available in the San Francisco Bay and Los Angeles areas. The are targeted to consumers who live in areas where public transportation is available, reducing the need to rely on cars, as well as the costs associated with doing so. The LEM is a fixed interest rate, 15- to 30-year mortgage that requires a downpayment of at least 3 percent of the appraised value of the property and has a 97 percent loan-to-value (LTV) ratio.

Government Loans

The Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), and the Rural Housing Services (RHS) are agencies that offer government-insured loans. To obtain these loans, you must apply through a lender that is approved to provide them. All of these agencies require certain minimum standards for the properties being purchased.

Through the FHA, you can purchase a home with a very low downpayment, typically 3 percent to 5 percent of the FHA-appraisal value or the purchase price, whichever is lower. In addition, the FHA's applicant standards are more lenient than conventional loans; you don't necessarily have to have a spotless credit record or a high-paying job to qualify. FHA mortgages have a maximum loan limit that varies depending on the average cost of housing in a particular region.

The VA program allows qualified veterans to buy a house costing up to $203,000, in most cases with no downpayment and at below-market interest rates. Moreover, the qualification guidelines for VA loans are more flexible than criteria for either FHA or conventional loans. The VA application process is similar to any other type of mortgage loan, and many VA loans can be processed and closed without waiting for credit application approval. To determine whether you are eligible, check with your nearest VA regional office.

The Rural Housing Service, a branch of the U.S. Department of Agriculture, offers low-interest-rate mortgage loans with no downpayment requirements to low- and moderate-income borrowers who live in rural areas or small towns. The RHS also offers programs for home renovations and repairs. Check with your local RHS office or lender for eligibility requirements.

Graduated Payment Mortgage

The Graduated Payment Mortgage (GPM) is another alternative to adjustable-rate mortgages. Contrary to an ARM, GPMs have a fixed-note rate and payment schedule. However, GPM payments typically are set for only one year at a time. Each year for five years, the payments graduate at 7.5 percent to 12.5 percent of the previous year's payment. You may obtain a GPM in 30-year and 15-year repayment schedules.

Borrowers can maximize their purchasing power through the GPM's lower qualifying rate. GPMs also can be attractive in a market with rapid appreciation. In markets with moderate appreciation, a borrower who needs to move during the scheduled negative amortization period could face financial problems.

Initiating the Mortgage Process

Inform Yourself First

First-time and experienced buyers alike may find themselves overwhelmed by the mortgage process. With so many options -- each offering unique advantages and disadvantages -- determining the early steps to take can be baffling.

Before initiating the mortgage process, you'll want to be fully educated. Whether you peruse Web sites or attend a mortgage seminar, there are many ways to find out what to expect. And as always, your REALTOR® can answer any questions you may have, as can financial planners, mortgage brokers, or lenders.

What's in a Price?

As you initiate the mortgage process, you'll want to ensure that your monthly payments fit into your budget. Are you aware that the price isn't the only factor contributing to the amount of your monthly payments? In actuality, the price is comprised of principal, interest, taxes and insurance, which combined, are commonly called PITI. To determine your average monthly payment, lenders suggest devoting no more than 28 percent of your gross income to PITI. Of course, how much home you can afford depends greatly on other factors as well: your income, credit, savings and financing, to name a few variables.

Applying for a Mortgage

Prior to applying for a loan, you'll need several items, including pre-approval information (if applicable), the ratified sales contract, earnest money and a home inspection report.

A ratified sales contract is proof that both buyer and seller have agreed on the final purchase deal. It serves as the final contract subsequent to the purchase agreement and any counteroffers. This contract specifies the amount of your downpayment, the purchase price, the type of mortgage you're seeking, and your proposed closing and occupancy dates.

When you visit your lender, you'll need to complete a Uniform Residential Loan Application. This document asks detailed questions about you, your income, your assets and liabilities, your credit history, and the property you plan to buy. Check with your lender about the additional documentation you'll be required to supply, which can include paycheck stubs, tax returns, bank account statements and other articles.

Decisions to Make

Once you've arrived at the application stage, you'll need to know what type of mortgage you want and the mortgage amount. 

Keep in mind that the type of mortgage you select directly affects the home price you can afford and the amount of your mortgage payments. Your ratified sales contract may depend on your ability to secure approval for the kind of loan you choose.

You've probably already estimated how much money you want to borrow. The best way to determine the exact amount of your mortgage is to base the figure upon the purchase price of the home and the amount of your downpayment. If you're using your pre-qualification from a lender to determine the amount of your loan, remember that pre-qualification is only a ballpark figure and not equivalent to being pre-approved.

Happy Thanksgiving

The Home Buying Process from Start to Finish

Now that you've found the perfect home, it's time to get the deal rolling. You'll need to sign a residential purchase agreement, make an offer, possibly put down a deposit, conduct inspections and close the sale. If this all sounds overwhelming to you, don't worry; your REALTOR® will guide you through each step.

Making An Offer/Residential Purchase Agreements and Buyer Representation Agreements

If you're ready to purchase the home, you must get all the details in writing. The offer begins with a written proposal spelling out your price and any stipulations regarding the purchase. If the seller has agreed to pay part of the closing costs, for example, that needs to be specified in the accepted offer. In addition, sometimes offers to purchase are contingent upon factors like the buyers' ability to obtain financing or the sellers finding housing within a certain time frame.

The residential purchase agreement contains the comprehensive terms of the deal, including sales price, deposit, closing date, disclosure requirements, inspections, and fees agreed upon by both parties. Other provisions also are included, such as the buyer's final inspection and the method by which all real estate taxes and other bills will be pro-rated between buyer and seller.

The CALIFORNIA ASSOCIATION OF REALTORS® offers its own official agreement, the C.A.R. Residential Purchase Agreement and Joint Escrow Instructions (RPA-11). This multi-functional document serves as an offer to purchase real property, a completed contract when its signed by the buyer and seller and communication of acceptance is received, a receipt for good faith earnest money deposit, and more.

Summaries of the Residential Purchase Agreement are available in Spanish, Chinese, Korean, Tagalog and Vietnamese. To purchase these summaries, please click here and select "Multi-Language" in the menu on the left side of the page. Then click on item #BC610A.

In response to requests from C.A.R. members practicing in the greater San Francisco Bay Area, C.A.R. developed a second version of its RPA-11 in late 2000. The Area Edition Residential Purchase Agreement (and Joint Escrow Instructions) (AEPA-11) addresses the contractual approach to the real estate transaction adopted in this area of the Golden State. The publications Understanding and Completing The C.A.R. Residential Purchase Agreement and Joint Escrow Instructions and the Area Edition Supplement to Understanding and Completing The C.A.R. Residential Purchase Agreement and Joint Escrow Instructions explain both forms in detail.

Another standard form produced by C.A.R. and typically used by California REALTORS®, BR-11 (Buyer Broker Representation Agreement) is an agreement between a potential buyer of real property and a real estate broker. The agreement defines the scope of the tasks and duties to be performed by the buyer and broker leading up to the completion of a real estate sale. The form also provides a written consent to a dual agency if one develops, and informs the buyer that the broker or agents for the broker may be working with other buyers looking for similar properties. The agreement does not, however, obligate a buyer to pay the broker for services rendered. Even if an agreement is signed, a broker must still look to a seller or a listing broker for compensation. This form is non-exclusive and may be revoked at any time by either the buyer or broker. In addition, the agreement places a limit on the time within which a legal action can be brought against the broker. More information about C.A.R.'s buyer-broker representation agreements is available by clicking here.

There are ways for buyers to look more appealing to a seller, thereby possibly gaining a negotiating edge. All-cash buyers and those already pre-approved for a mortgage have an advantage. In addition, sellers who are ready to move prefer buyers who don't have a present house to sell first.

An offer to purchase is often followed by a counteroffer by the seller, which can be countered again by the buyer. This is common practice as both sides attempt to negotiate an agreement that meets their individual needs.

Completing the residential purchase agreement is a complicated part of the transaction process that buyers shouldn't enter into without the assistance of a REALTOR®. REALTORS® have access to the standard forms needed and receive updates from their local, state and national associations on state and federal laws regulating agreements. REALTORS® can either answer any questions you might have or refer you to the appropriate authority.

Buyers' Up-Front Fees

In conjunction with the residential purchase agreement, buyers are usually expected to put down a deposit at the beginning of the transaction. If the buyer completes the sale, this money will be credited toward the buyer's downpayment. If the buyer doesn't complete the sale for legal or contractual reasons, the money is typically returned. However, if the buyer doesn't complete the sale for other reasons, the seller may be entitled to keep the deposit. The U.S. Department of Housing and Urban Development (HUD) advises that deposits should be "substantial enough to demonstrate good faith," usually 1 to 5 percent of the purchase price. Often, buyers may put up to 20 percent down.

Because buyers frequently pay for most inspections, it may be a good idea to investigate the costs of the inspections you plan to obtain before an offer is made.

Home Inspections vs. Appraisals

Home inspections vary greatly. Some check the home's structure, construction and mechanical systems, and appliances, which may be transferred with the property. Although different inspectors look for and test different things and may not discover everything that is wrong with a property, obtaining inspections is the best way to become informed of necessary repairs or problems with the home. Be advised that inspectors do not assess the value of your home.

According to HUD, an inspector typically checks the electrical system, plumbing and waste disposal, the water heater, insulation and ventilation, the HVAC system, water source and quality, ceilings, walls, floors, and roof.

In addition to being inspected, the home will undergo an appraisal by a trained professional. An appraisal is an opinion of the property's value used primarily to protect the lender's interest. In contrast to home inspections, appraisals are based on past sales data, the location of the home, the size of the lot and the condition of the home. For mortgages insured through the FHA, appraisers must disclose potential problems relating to the physical condition of the home; there are no similar stipulations for non-FHA mortgages.

Your REALTOR® may recommend a qualified inspector or appraiser. Also, the California Real Estate Inspection Association and the Appraisal Subcommittee of the Federal Financial Institutions Examination Council offer member directories on their Web sites.

Closing

The closing is the day you've been waiting for: when ownership of the home officially transfers from the seller to you! Prior to the closing, the escrow agent will present you with scores of legal documents to review and sign, and you'll be expected to pay your downpayment and closing costs. In addition, a number of other legal procedures must be completed before the sale can close, including approving the mortgage application, clearing the title, appraising the property and recording the deed.

The Real Estate Settlement Procedures Act (RESPA) provides specific protection to buyers before, during and after closing. If a settlement service has referred you to a REALTOR® with whom the service has a business connection, an Affiliated Business Arrangement Disclosure is required prior to closing. You're entitled to receive a preliminary copy of a HUD-1 Settlement Statement, which lists estimates of all settlement fees to be paid by buyer and seller, if you request it 24 hours before closing; the final HUD-1 Statement is a requisite part of closing. In addition, an Initial Escrow Settlement Statement is required at closing or within 45 days of closing. This details the estimated taxes, insurance premiums and other charges that must be paid from the escrow account during the first year of the loan.

Within three days after your loan application is received, your lender must deliver or mail you a "good faith estimate" of the total amount due at closing, as well as a copy of the HUD publication Settlement Costs: A HUD Guide. Closing costs typically are comprised of attorneys' or escrow fees, property taxes, interest, loan origination fees, recording fees, survey fees, first premium of mortgage insurance, title insurance, loan discount points, first payment to escrow account, paid receipt for homeowner's insurance policy and any documentation preparation fees. Fannie Mae estimates that most buyers' closing costs amount to 3 to 6 percent of the sales price.

As with the other components of the buying transaction, your REALTOR® can answer your questions and provide additional information to ensure a smooth closing.