Buyers Take Notice!
It is not too late to take advantage of the $7,500 First Time Buyer IRS Tax Credit, included in the enactment of the Housing and Economic Recovery Act of 2008, which applies to first time buyer home purchases of a principle residence between April 9, 2008 and July 1, 2009.
A tax credit is a not deduction. It is a reduction in income taxes owed! In other words, when you file your income taxes for the year the home was purchased (2008 or 2009), you will be able to subtract $7,500 from the amount of federal tax liability owed which will either increase your tax refund or reduce the amount of money owed to the IRS. I am providing various links for further explanation and details of this program.
However, this tax credit is not free. It has to be paid back. Repayment begins two years after the credit is claimed, and must be repaid within 15 years. That’s $500 per year. Yes, it would have been much better if there was no repayment provision, but an interest free loan for 15 years is not such a bad thing, is it? That’s right; there is no interest on the tax credit received!
A first time buyer may question the benefits of a tax credit which requires repayment. More first time buyers than not leave the closing table and have little left in savings after the purchase of their home. As new homeowners, they are now confronted with a mortgage payment that exceeds what they were accustomed to paying in rent. They have a home to furnish, with more rooms to fill with furniture than their apartment in most cases. They may also need to spend money on painting, some redecorating, carpeting and window coverings. In addition, there are other home ownership necessities such as a lawn mower, ladder, garden tools and the like which must be purchased, not to mention the expense of making any costly repairs or improvements the home may require.
More often than not these purchases are made with a charge card, with interest rates that are upward of 17%. These additional monthly expenses for home related purchases are in addition to the large monthly mortgage payment they now have. So why wouldn’t a buyer be excited about obtaining the $7,500 tax credit, and having the benefit of repaying it over 15 years without interest?
What if a first time buyer really liked a home they saw which needed some major repairs or renovation, a home that represented a great buying opportunity? But after much consideration, they decided against buying it. They just didn’t have the financial resources after the closing to accomplish the type of repairs required, such as a new furnace or new roof or new siding or new windows. Wouldn’t the opportunity to obtain $7,500 in an income tax refund possibly be the answer to this type of concern?
Talk about savings. Let’s assume a first time buyer will have cash reserves after closing and is financially prepared for the purchase of the various items mentioned above. Why would a $7,500 tax credit, which has to be repaid, be beneficial to them?
Let’s assume a $300,000 mortgage was needed in the home purchase at 6.5% interest for 30 years. What if the $7,500 tax credit refund was used to pre-pay the mortgage? Using simple math, that would be an annual interest savings of $487.50, just about equal to the $500 per year repayment obligation.
The truth in the matter is that the savings is much greater than the simple math calculation. Pre-paying the mortgage by $7,500 will not reduce the monthly mortgage payment of a fixed rate mortgage. That remains the same. The real benefit is this. The outstanding mortgage balance is reduced by $7,500 and each future mortgage payment results in savings in mortgage interest and increased principal mortgage reduction. With each monthly mortgage payment more money goes to reducing the mortgage balance and less is applied to interest. Together these savings will exceed the $500 cost of repayment of the tax credit. The benefit over the term of the mortgage in interest savings and mortgage reduction will be quite surprising.
What if the buyer prefers obtaining an adjustable rate mortgage or some type of a step down mortgage loan where the mortgage interest rate is lower in the first year and increases in the second or third year? If the $7,500 tax credit is used to pre-pay the mortgage, the new monthly mortgage payment in the rate adjustment year will be lower than it would have originally been as the outstanding mortgage balance has now been reduced by the $7,500 pre-payment.
What if the home is sold prior to repayment of the tax credit? Another provision requires repayment of the balance of the tax credit owed in the event of a sale of the home prior to full repayment. However, special provisions do provide for circumstances where the balance owed is greater than the gain in value or when there is a loss in value. If the gain on the sale is less than the amount owed, part of the balance owed will be forgiven. If there was no gain, or even a loss, then the remaining balance would not need to be repaid.
As a REALTOR, I am excited for buyers who are eligible for this IRS $7,500 First Time Buyer Tax Credit. Qualified first time buyers should be excited too! Combined with favorable mortgage interest rates, a wide selection of homes for sale and more affordable home prices, this tax credit may be just the stimulus and financial assistance many first time buyers need to move forward and make a commitment to purchase a home now, rather than just look at homes and wait for a better time to buy!
Please read the information below!
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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!
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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!
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Date: Aug. 8, 2008
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Buyers should be educated and informed when making an offer to purchase a home.
Surprises are for birthdays, not buying a home!
Initial Deposit
Be prepared to write a deposit check when making a contract offer to purchase real estate. Commonly referred to as a Binder, this is the check made out to the Selling Real Estate Office when submitting a contract offer. In simple terms, it is a good faith deposit to express interest in purchasing real estate.
What is the required amount of a Binder deposit? There is no law as to a required amount, but local real estate practices may determine what is acceptable. Common sense should prevail in determining the amount of the Binder deposit however. Writing a check for say $100.00 shows good faith, but what kind of statement is that making to the owner when the offer is presented to them? Would a more substantial Binder, say $1,000.00, make a stronger statement? More will follow later in discussing strategies in structuring a contract offer.
The Binder is generally not deposited by the Real Estate Broker until there is offer and acceptance, a signed contract of sale. However, there are State Real Estate Licensing Laws which regulate how long a Real Estate Broker can hold a deposit check without depositing it into the Company’s Trust Account. In cases where contract negotiations are prolonged, perhaps beyond five business days, most Real Estate Brokers will either deposit the check into their Trust Account during the negotiations,or ask the buyer to write a new check as contract negotiations continue.
If the contract offer is not accepted, the Binder is returned to the buyer. If the contract offer is accepted and signed by the owner, the Binder will then be deposited in the Broker’s Trust Account and will be applied to the buyer’s down payment and the purchase price.
Earnest Money Deposit
Commonly referred to as the second deposit, this is the additional upfront deposit made in the purchase of real estate and is also part of the buyer's total down payment. Depending on the real estate market the home is being purchased in, the price range and the total amount of the down payment, the earnest money deposit could be 10% of the purchase price.
More often than not, especially with first time buyers, homes are purchased where the total down payment is less than 10% of the purchase price. In those circumstances, the earnest money deposit will generally be some portion of the total down payment or perhaps the entire amount of the down payment in a transaction where the buyer is using a down total payment of 3% to purchase a home. As with most aspects of purchasing a home, the earnest money deposit is something that may be determined in contract negotiations.
The earnest money deposit is generally paid within a certain time frame after completion of Attorney Review, and is generally paid to the Selling Broker, unless there is a change made during the Attorney Review process where the Seller’s Attorney may request to hold all deposit monies in their Trust Account.
There are times when a contract of sale is terminated after Attorney Review, such as a home inspection revealing problems with the home or mortgage denial. In those situations where a contract to purchase is cancelled in accordance with the terms of the contract, all deposit monies previously paid by the buyer are refunded.
More will follow later in discussing strategies in structuring a contract offer.
Mortgage Considerations
A contract to purchase real estate will include a mortgage contingency clause which provides a time period for the buyer to apply for a mortgage of a specific amount and obtain mortgage approval in order to complete the purchase. The time frame for mortgage approval varies, and is determined by the type of mortgage being obtained (Conventional, FHA, and VA). A buyer’s Real Estate Agent or Mortgage Representative can help in providing more information about this.
It is recommended that a buyer reviews their Mortgage Pre-Approval when submitting a contract offer, and provide a copy to their Agent. Review is necessary to verify that that the mortgage amount in the sales contract offer is the amount in the Mortgage Pre-Approval, or less.
All too often buyers begin their home search in one price range and later find that they need to increase that price range, and increase the mortgage amount, to find a home they like. Obtaining an updated and revised Mortgage Pre-Approval to reflect the mortgage amount in the contract offer is highly recommended.
Mortgage Interest Rates and Mortgage Rate Lock-Ins
Another important consideration is mortgage interest rates. Mortgage interest rates fluctuate from day to day and from one mortgage lender to another. Buyers should obtain a current interest rate quote when making a contract offer as this rate may be different from the interest rate quoted when the Pre-Approval was issued. The interest rate affects mortgage payments, mortgage qualifying and price range.
When submitting a contract offer, a closing date is filled in and is included as part of the contract offer and perhaps contract negotiations. The closing date in the contract can be a consideration as it relates to the mortgage interest rate lock-in. Mortgage lenders have various interest rate lock-in policies. Consult with the Mortgage Representative to obtain more information on interest rate lock-in policies and length of interest rate lock-in period.
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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.
Some Preliminary Information
There is more to purchasing a home than just looking at houses.
The first step toward purchasing a home is obtaining Mortgage Pre-Approval from a reputable Mortgage Lender( Read Mortgage Pre-Approval versus Mortgage Pre-Qualification), and be sure a copy is included with the contract offer. Why? The first question to be asked by the seller and listing agent at a contract presentation will be “Does the buyer have Mortgage Pre-Approval?
Secondly, there is no cardinal rule that there must be some fixed amount that a seller will negotiate from their asking price. Home buyers need to obtain factual sales information about the market area, and section of Town, they are considering buying in before submitting an offer. While it is very likely that sale prices have declined in the past two years, they have not dropped equally in all Towns and in all neighborhood locations. Remember Economics 101 from Grammar School: “What’s true of the whole may not be true of the parts”. That is what I am referring to here. Real estate values are local, and various factors influence market value such as buyer demand, amount of homes for sale, mortgage rates, local economic conditions and so on and so on.
In preparing a contract offer, it is important that a buyer obtain a Market Analysis for the property being considered. A report like this can be prepared by the buyer’s agent and should contain information comparing similar properties which are active on the market for sale, listings which expired and did not sell in the past six months, under contract sales and closed sales in the past six months which should also provide the asking price history and days on market before sold. With a report like this, a buyer can then have a better understanding of the real estate market and be better prepared in submitting a contract offer.
It is highly recommended that buyers obtain a blank contract of sale and addendums early in the home searching process. Contracts can be intimidating to many buyers. It would be much better to review the contract documents in advance of making a contract offer. Making a contract offer is a big step. Being properly prepared is the first step toward making a successful contract offer.
Thirdly, buyers should be completely aware of their personal finances and the total costs of purchasing a home. Buying a home involves down payment, expenses occurred during the purchase such, as mortgage application fee, home inspection and termite inspection and then there are the closing costs. It is important to obtain the estimates related to transaction expenses as these costs could have an affect on the amount of the available down payment which then could affect the amount of the mortgage needed to complete the purchase.
The three additional topics related to preparing a contract of will be later.
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