Now is the Time to Think About Saving Money!

Mortgage Interest Rates continue to fall! As reported yesterday by Freddie Mac , "the average rate on 30 year fixed mortgages dropped to 5.19% from the year's previous low of 5.47%".

And that is the average rate for mortgages across the Country. I have already saw interest rate quotes below 5%, but I need to confirm that. Selling real estate for 37 years now, seeing mortgage interest rates for a 30 year fixed mortage at or around 5% is a rarity, an almost once in a lifetime type of event! Interest rates this low create opportunities for not only first time home buyers, but also provides opportunities for current homeowners in refinancing and perhaps the opportunity to consider purchasing a vacation home or investment property.

What are the savings? Just a very short while ago, mortgage rates on a fixed rate mortgage for 30 years were hovering between 6% and 6.375%. For a $300,000 mortgage for 30 years at 6.375%, the mortgage payment for principal and interest is $1,872. With rates at 5%, the payment is $1,611. That is a monthly savings of $261 and $3,132 in annual savings on monthly mortgage payments

For buyers thinking about purchasing their first home, for homeowners desiring to move up to a larger home or considering refinancing, now is the time to move beyond the thinking mode.

Buyers Take Notice!

Considering taking advantage of the favorable mortgage interest rates?  Considering taking advantage of these historically low mortgage rates to look for and buy a home?  Before taking the time to drive around looking for a home, before taking the time to visit Open Houses and before taking the time to meet with a REALTOR® to look at homes, meet with a Mortgage Lender to review the mortgage process and obtain Mortgage Pre-Approval.

The reality is that most all buyers need to obtain a mortgage to buy a home. Since so few buyers are able to think about buying a home and paying cash, wouldn’t it make sense taking care of the financial details first?

Price range is determined by the down payment plus the mortgage amount to be borrowed. The mortgage amount is determined by income qualifications, credit and other important criteria.

Not only is obtaining Mortgage Pre-Approval important to the buyer themselves, but it becomes even more important in the process of searching for a home and making contract offers. Most experienced REALTORS® require their clients to have Mortgage Pre-Approval and, more importantly, very few home sellers will even consider a contract offer without Mortgage Pre-Approval.

Many buyers have asked, “is there a difference between a Pre-Qualification letter and a Pre-Approval letter” or “does it make a difference if I have Mortgage Pre-Approval or Mortgage Pre-Qualification”? These terms appear to be similar, but are in fact quite different. Not only do they cause confusion for home buyers, but there seems to be many interpretations from those in the real estate and mortgage industry as well.

Speaking as a REALTOR®, the difference is documentation and verification. In other words, is the buyer providing copies of income paystubs and bank account statements to the Mortgage Lender in the pre-approval process or is the Mortgage Lender simply relying on verbal information provided by the buyer? More often than not, the difference between the two terms is that one is issued without any verification of information and the other starts with the buyer providing written documentation of all information submitted. While neither is a considered to be a mortgage commitment, nor a written mortgage guarantee, obtaining a Mortgage Pre-Approval letter is more preferred than obtaining a Mortgage Pre-Qualification letter.

Based upon my experiences in selling real estate and helping buyers obtain mortgage financing, Mortgage Pre-Qualification is generally a process where a buyer contacts a Mortgage Lender/Mortgage Rep, often on the phone, who then asks the buyer to provide some information such as current address and how long living there, social security number in order to obtain a credit report, down payment amount and annual income. I assume a credit check authorization form is signed by the buyer and faxed to the Mortgage Lender. After the credit check is ordered and received by the Mortgage Lender, the Mortgage Rep then estimates the amount of mortgage the buyer can afford and sends(via fax or email) a letter to the buyer with the title Congratulations, You Are Pre-Qualified, for a mortgage loan in the amount of $___________ and a purchase price of $__________.  This is usually done within a half hour or so of the initial phone call, and at best can be described as an estimate of borrowing ability, and not Mortgage Pre-Approval.

In the qualification letter, varying type disclaimer information is always included such as: subject to a formal mortgage application and payment of application fee, subject to verification of employment, subject to verification of assets, subject to credit review, subject to mortgage underwriting guidelines, interest rate to be the prevailing rate of interest for the mortgage type applied for, among many other subject to statements. In other words, we will give you a mortgage when we see that the information is correct.

What kind of problems could arise when a formal mortgage application is submitted by the buyer after they’ve obtained a Mortgage Pre-Qualification letter like that one? The mortgage application process involves somewhat standard underwriting criteria and guidelines for each particular type mortgage, whether VA, FHA, Conventional and other variations of each.

The Buyer does have a Pre-Qualification letter, but how reliable is it if important information such as income, debts and assets, while assumed to be correct and accurate, has not been at least verified with copies of paystubs, savings accounts, charge card statements, etc.? Yes, it is possible that the buyer provided correct information and will obtain a mortgage commitment when a mortgage application is submitted. However, there are many circumstances where even though the information verbally provided is accurate, certain other details are not mentioned which may have a negative impact on the mortgage approval process. Details like income being received off the books, down payment being borrowed(not gifted from a family member), savings for the down payment only but no other assets for closing costs or inconsistency in work history to name just a few situations that can cause problems in obtaining mortgage approval.

While Pre-Qualification letters like the previous example are common, not all Mortgage Lenders provide Pre Qualification letters in that manner. Since the mortgage application and approval process involves a credit check, income verification and asset verification among other criteria, many Mortgage Lenders require a more thorough process in providing Mortgage Pre-Approval. In addition to obtaining a credit report, many Lenders require the buyer to provide proof of two years of income, pay-stubs or income tax forms, copies of bank statements and copies of charge card statements.

When all the information is complete and the credit report is obtained, it is then submitted to the Mortgage Underwriter for review and approval, who then issues the Mortgage Pre-Approval letter. In fact, the Mortgage Pre-Approval letter is worded something like this: Congratulations, You Are Pre-Approved for a mortgage loan in the amount of $________ and a purchase price of $__________ subject to a Contract of Sale and a satisfactory Bank Appraisal on the home being purchased. While more time consuming than the previous pre-qualification practice discussed above, not only is it more thorough and more reliable, it also provides a shorter mortgage application time process and provides the ability for a fast closing when one is desired.

Consider the advantages of this type Mortgage Pre-Approval. First of all, there is the confidence for the buyer in obtaining a written mortgage commitment for the home they have just signed a contract for and the home they have already made an investment in; hiring an Attorney for contract review and hiring an Home Inspector to perform the Home Inspection, Termite Inspection, Radon Inspection and any other required inspections. Needless to say, I can’t even count the number of real estate transactions I’ve heard about that fell apart after the buyer paid for the bank appraisal and all the inspections due to the buyer not being able to obtain mortgage approval, even with a Pre-Qualification letter. It just doesn’t make sense!

Even more important is the benefit in negotiating with a seller in the purchase of a home, something that can make the difference of being the buyer who gets the signed contract or being able to negotiate a better price. The Mortgage Pre-Approval provides comfort to the seller and REALTORS® in knowing that they have a serious buyer and one who has already taken the most important step in buying a home, arranging the financing first!

Help yourself negotiate for a better home purchase.

Contact a Mortgage Lender to discuss obtaining Mortgage Pre-Approval before you get in the car to look at houses! It is worth the effort, trust me!

When selling a home, there are many factors which affect market value and the eventual sale price of a home, such as location, condition, size, amenities, features, improvements and upgrades, local economic conditions, the current real estate market and mortgage interest rates, among others. Some of these factors are within the control of the owner, and others are beyond the control of the owner.

The definition of Fair Market Value includes various terms such as: the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale; the buyer and seller each acting prudently and knowledgeably; assuming the price is not affected by undue stimulus; normal marketing time period, informed buyer and seller.

In helping owners obtain a Market Value estimate for their home, REALTORS® can provide a Comparative Market Analysis (commonly referred to as CMA). A thorough Market Analysis will include full property details and pricing information of the most comparable type properties currently listed on the market for sale, recent pending or under contract sales, those where a contract offer has been accepted, recently closed sales transactions as well as listings which have expired, those that did not sell during the marketing time period. The purpose of a report like this is to provide the owner with factual information to help them in their decision to sell by providing a recommended asking price and estimated sales price. While no two properties are truly identical, an analysis like this can provide home owners with the most reliable method of obtaining a market value estimate for their home.

In the process of reviewing the pricing information however, it is quite common for owners to question the market value estimate and pricing recommendations. The questions and concerns they have about price, while valid in their situation, do not have an affect in determining the market value for their home. What are some of the factors that do not have an effect in establishing Market Value?

                                            ...The Price Paid for the Home...

The price paid for a home one year ago, three years ago, five or ten years ago has nothing to do with what the home is worth today. Real estate values exist at a fixed point in time. A home may have been purchased for $300,000 three years ago, and may be worth $315,000 today. Someone else may have bought a substantially similar home for $250,000 five years ago and it is worth $315,000 today. That is a drastic difference in equity in a relatively short period of time.

Real estate ownership has been blessed with appreciation in home values, but that appreciation is not always in a straight line. Real estate values are not static. Over the long term, an investment in real estate is generally considered the most valuable type of investment, one with the best financial returns. Over the long run, it is probably the best investment people can make.

Depending on the market conditions when the home was purchased, some owners were fortunate and purchased in a buyers market before the increases in real estate values like we just recently witnessed between 2001 and 2006. Others may have bought at the end of a strong real market and were forced to pay top dollar in a highly competitive sellers market, as many owners are experiencing now who purchased their home late in 2006. It is economic market conditions, the economy, employment, mortgage rates, supply and demand, that create changes in the real estate market and cause real estate values to increase, remain stable and perhaps drop at different periods of time. These are the factors that are beyond an owner’s control.

All owners would like to get the price they feel they should get for their home when they choose to sell. The reality is, their home is worth what it is worth, and that is the price a willing buyer is willing to pay. A buyer will not pay more for a home than what they would have to pay for another home with similar features and amenities in a similar location, something called the “Principle of Substitution”.

It is for that reason why so much reliance is placed on sales data when establishing market value, and not personal emotions or personal circumstances.

                               ...When the Home Was Purchased...

Whether a home was purchased twenty five years ago, three years ago or just last year, the purchase price was the value when it was purchased, and has nothing to do with it’s market value when being sold. A seller with twenty five years of home ownership and substantial equity has the same right to fair market value as an owner with just 3 years of home ownership and perhaps little or no equity accumulation.

Decisions to sell may be difficult for owners with short term ownership especially when real estate values have not increased or have possibly dropped since the home was purchased. Home owners with long term ownership and substantial equity can make selling decisions easier than owners selling their home without the benefit of real estate appreciation. In either case, the market is the market, regardless of when the home was purchased, and the home is worth what is worth.

...Actual Cost of Improvements and Repairs...

While it is true that that the condition of a home has a definite affect on its market value, and that a well maintained home will sell for more than a home in need of updating and repair, the actual cost of making repairs and improvements may not be equal to the increase in market value. Why? Cost does not necessarily equal value in real estate.

Repairs and improvements are two different things. A repair corrects something that is broken or not working properly, and does not necessarily add value to a home when fixed. Some types of repairs are considered necessary repairs. A leaking faucet, broken windows, clogged drains, screens with holes, gutters hanging from the roof, missing downspouts, cracked concrete walkways, among others. Repairs like these can be considered deferred maintenance, are considered minor repairs. They are maintenance related and are easily noticed by buyers. They draw attention and become distracting. If not taken care of, conditions like these will definitely have a negative impact on the marketability of a home which will then have a negative affect on market value. When repaired or fixed, these type repairs make a home more saleable, not necessarily more valuable. In other words, just because repairs cost $1,500 does not mean that they have increased the value of the home in that amount. However, if not repaired, they could result in a loss in value of more than the cost to repair and, maybe more important, the loss of potential buyers because they feel the home needs too much work.

What about the roof, exterior siding, windows, heating system, electrical system, central air conditioning system and hot water heater? These type improvements are more costly than the repair items noted above and can have a larger impact on marketability and market value. While a buyer may not rave about how beautiful the furnace looks because it is now, they will definitely have negative thoughts on a home where the furnace is original and is 50 years old. A new or newer furnace will be more efficient than the original, save the buyer money in monthly fuel bills and, more importantly, is an item that will not need to be replaced by the buyer in the near future.

These type items relate to the effective age of a home. The chronological age of a home can be different from its effective age. There is a life expectancy in how long a roof will last, how long a furnace will last, etc. A 50 year home can have an effective age of 20-30 years when improvements like these have been made. When comparing homes, buyers are concerned with near future essential improvements which need to be made, especially those that are costly, like these. Quite often buyers will pass up on homes they are interested in simply because they need too much future updating, even if the asking price is appropriate considering the condition of the home. Why? Very often they just do not have the time or inclination to take care of major updating, but more importantly, they may not have the additional cash to make the improvements after closing as they have exhausted their savings for the down payment and closing costs.   

Should a homeowner replace the original 50 year old furnace when they are ready to sell? Should they invest the $2,300 to $4,000 and have the furnace replaced? A furnace is an integral system to the home, and one buyers are concerned with. However, it is just aspect of the home. The question relates more to whether it will cost more to sell the home with the original furnace than what it would cost to replace. If the furnace is the only item requiring immediate attention, it may not prevent a sale. However, if there are other must do improvements, it will have a negative impact on market value.

Decisions like this have to take into consideration the overall condition of the home. When investing in a new furnace today and spending $2,500, what is the likelihood of receiving a full return on the investment? The reality is that it will help sell the home, but not necessarily at a price to recapture the cost of new furnace.

 ...How Much the Seller Needs...

A contract offer to purchase real estate includes sales price, mortgage to be obtained and down payment.

Down Payment

The buyer’s down payment is somewhat fixed. It is generally that amount of money they have saved, or have available, for the purchase of a home. However, there are minimum down payment requirements depending on the type of mortgage to be obtained.

When applying for a mortgage loan, the lender does verify the buyer’s assets. Commonly referred to as deposit verification, this occurs during the mortgage application process to insure that the buyer has the funds for the down payment as well as additional monies for closing cost expenses.

In making a contract offer to buy a home, it is highly recommended that a buyer be aware of the various costs involved with their purchase and obtain a reliable estimate of closing costs either from their Selling Agent, Mortgage Lender or Attorney. Some of the costs related to closing title are directly related to the home being purchased, others are fees paid for services provided and then there are the costs related to the mortgage.

It is quite common for buyers to get assistance for the down payment, or closing costs, from family members. The mortgage lender will require a “gift letter” from the donor, and will also verify that these monies are available. While it is great that a family member says they will help in the home purchase, it is very important that a buyer in this situation obtains a commitment for an exact amount they will be given and explain the verification process in advance to the donor in order to avoid any complications later. A mortgage lender can provide specific details.

There are times when the family provides the gift money in advance of the home purchase and mortgage application. It is important that the buyer creates a paper trail with a copy of the check received, and the deposit slip depositing the money in their bank account. During the mortgage application process, the lender will ask for an explanation on any recent large deposits.

 Mortgage Payment

The mortgage amount, and monthly mortgage payment, is determined by the buyer’s income qualifications. There are buyers who choose to maximize the amount of the mortgage as it relates to income qualifications, while there are other buyers who choose to mortgage less in a mortgage than their income warrants in order keep the monthly mortgage payment at a more affordable amount. That is all about personal choice.

When applying for a mortgage loan, the lender does verify the buyer’s income, and requires copies of current pay stubs and prior income tax returns. Commonly referred to as income verification, this occurs during the mortgage application process to insure that the buyer has sufficient income to qualify for the mortgage loan requested.

A monthly mortgage payment includes principal, interest, real estate taxes and home insurance, commonly referred to as PITI, and is what is estimated in the pre-qualification process. During the mortgage pre-approval process, mortgage lenders calculate mortgage qualifications based on the current mortgage interest rate, estimated real estate taxes and estimated homeowners insurance. However, mortgage pre-approval for a specific mortgage amount is only an estimate.

There are situations where the pre-approved mortgage amount and price range is beyond affordability for a buyer. This can occur if the mortgage interest rate increases during the home searching process, or during the mortgage application process and the interest rate was not locked in. Likewise, if the home to be purchased has higher real estate taxes than what was estimated in the pre-approval process, the monthly mortgage payment will be higher and may be beyond affordability.

It is highly recommended that a buyer knows what the monthly mortgage payment will be based on their contract offer and match that payment to their mortgage pre-approval.

It is not purchase price which determines affordability, it is the monthly mortgage payment!

Buyers should be educated and informed when making an offer to purchase a home.
Surprises are for birthdays, not buying a home!

Be it the real estate market in 2008 or any other real estate market for that matter, the structure of a contract offer can be the difference in it being accepted or rejected. No, the offering price is not the only factor in negotiating a contract to purchase a home in real estate.

Regardless of the number of pages in the sales contract, a contract offer can be broker down into 3 separate parts which can be important to the seller: price, terms and conditions. Each has to be satisfactory in order to obtain seller acceptance. In some situations, full price offers are not acceptable due to the buyer’s terms and conditions in the contract offer. In other instances, I’ve seen contracts accepted which were much lower in price than other competing offers, but were more favorable in terms and conditions to the seller, and were accepted. What then is the secret in preparing and submitting a contract offer to buy real estate? This is where the value of an experienced Buyer’s Agent is with providing assistance in preparing the contract offer and structuring it in a manner that does not create questions or concerns for the seller and their listing agent.

Thank you visiting my Blog, JustRealEstateTalk!

I am working on providing much more content and it will be added as quickly as possible. May I have your help? Is there particular real estate content or a particular subject about real estate you would like to see posted? Please let me know. Just click the email link in the right frame, and send an email message with your thoughts on a desired topic(s).

To those professionals associated with the Real Estate Industry, Attorneys, Mortgage Representatives, Inspection Companies, among others, who would have an interest in Authoring a new post and topic, please contact me. I would be happy to add you as an Author. The more content, the more varied the opinions, the better the information!

If you are pleased with this Blog, and content, please forward the link to others!

David Fialk, REALTOR
Broker Owner
Choice Realty Co.