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Eight steps to buying your home
  • 8 steps to buying your home

    1. decide to buy.
      although there are many good reasons for you to buy a home, wealth building ranks among the top of the list. we call home ownership the best “accidental investment” most people ever make. but, we believe when it is done right, home ownership becomes an “intentional investment” that lays the foundation for a life of financial security and personal choice. there are solid financial reasons to support your decision to buy a home, and, among these, equity buildup, value appreciation, and tax benefits stand out.base your decision to buy on facts, not fears.

      1. if you are paying rent, you very likely can afford to buy
      2. there is never a wrong time to buy the right home. all you need to do in the short run is find a good buy and make sure you have the financial ability to hold it for the long run
      3. the lack of a substantial down payment doesn’t prevent you from making your first home purchase
      4. a less-than-perfect credit score won’t necessarily stop you from buying a home
      5. the best way to get closer to buying your ultimate dream home is to buy your first home now
      6. buying a home doesn’t have to be complicated – there are many professionals who will help you along the way
    2. hire your agent.
      the typical real estate transaction involves at least two dozen separate individuals – insurance assessors, mortgage brokers and underwriters, inspectors, appraisers, escrow officers, buyer’s agents, seller’s agents, bankers, title researchers, and a number of other individuals whose actions and decisions have to be orchestrated in order to perform in harmony and get a home sale closed. it is the responsibility of your real estate agent to expertly coordinate all the professionals involved in your home purchase and to act as the advocate for you and your interests throughout.seven main roles of your real estate agenta buyer’s real estate agent:

      1. educates you about your market.
      2. analyzes your wants and needs.
      3. guides you to homes that fit your criteria.
      4. coordinates the work of other needed professionals.
      5. negotiates on your behalf.
      6. checks and double-checks paperwork and deadlines.
      7. solves any problems that may arise.

      eight important questions to ask your agent

      qualifications are important. however, finding a solid, professional agent means getting beyond the resume, and into what makes an agent effective. use the following questions as your starting point in hiring your licensed, professional real estate agent:

      1. why did you become a real estate agent?
      2. why should i work with you?
      3. what do you do better than other real estate agents?
      4. what process will you use to help me find the right home for my particular wants and needs?
      5. what are the most common things that go wrong in a transaction and how would you handle them?
      6. what are some mistakes that you think people make when buying their first home?
      7. what other professionals do you suggest we work with and what are their credentials?
      8. can you provide me with references or testimonials from past clients?
    3. secure financing.
      while you may find the thought of home ownership thrilling, the thought of taking on a mortgage may be downright chilling. many first-time buyers start out confused about the process or nervous about making such a large financial commitment.from start to finish, you will follow a six-step, easy-to-understand process to securing the financing for your first home.six steps to financing a home

      1. choose a loan officer (or mortgage specialist).
      2. make a loan application and get preapproved.
      3. determine what you want to pay and select a loan option.
      4. submit to the lender an accepted purchase offer contract.
      5. get an appraisal and title commitment.
      6. obtain funding at closing.
    4. you may think that shopping for homes starts with jumping in the car and driving all over town. and it’s true that hopping in the car to go look is probably the most exciting part of the home-buying process. however, driving around is fun for only so long – if weeks go by without finding what you’re looking for, the fun can fade pretty fast. that’s why we say that looking for your home begins with carefully assessing your values, wants, and needs, both for the short and long terms.questions to ask yourself
      1. what do i want my home to be close to?
      2. how much space do i need and why?
      3. which is more critical: location or size?
      4. would i be interested in a fixer-upper?
      5. how important is home value appreciation?
      6. is neighborhood stability and priority?
      7. would i be interested in a condo?
      8. would i be interested in new home construction?
      9. what features and amenities do i want? which do i really need?
    5. make an offer.
      when searching for your dream home, you were just that – a dreamer. now that you’re writing an offer, you need to be a businessperson. you need to approach this process with a cool head and a realistic perspective of your market. the three basic components of an offer are price, terms, and contingencies (or “conditions” in canada).price – the right price to offer must fairly reflect the true market value of the home you want to buy. your agent’s market research will guide this decision.terms – the other financial and timing factors that will be included in the offer.terms fall under six basic categories in a real estate offer:

      1. schedule – a schedule of events that has to happen before closing.
      2. conveyances – the items that stay with the house when the sellers leave.
      3. commission – the real estate commission or fee, for both the agent who works with the seller and the agents who works with the buyer.
      4. closing costs – it’s standard for buyers to pay their closing costs, but if you want to roll the costs into the loan, you need to write that into the contract.
      5. home warranty – this covers repairs or replacement of appliances and major systems. you may ask the seller to pay for this.
      6. earnest money – this protects the sellers from the possibility of your unexpectedly pulling of the deal and makes a statement about the seriousness of your offer.
    6. perform due diligence.
      unlike most major purchases, once you buy a home, you can’t return it if something breaks or doesn’t quite work like it’s supposed to. that’s why home owner’s insurance and property inspections are so important.a home owner’s insurance policy protects you in two ways:

      1. against loss or damage to the property itself
      2. liability in case someone sustains an injury while on your property

      the property inspection show expose the secret issues a home might hide so you know exactly what you’re getting into before you sign your closing papers.

      • your major concern is structural damage.
      • don’t sweat the small stuff. things that are easily fixed can be overlooked.
      • if you have a big problem show up in your inspection report, you should bring in a specialist. if the worst-case scenario turns out to be true, you might want to walk away from the purchase.
    7. close.
      the final stage of the home buying process is the lender’s confirmation of the home’s value and legal statue, and your continued credit-worthiness. this entails a survey, appraisal, title search, and a final check of your credit and finance. your agent will keep you posted on how each if progressing, but your work is pretty much done.you just have a few preclosing responsibilities:

      1. stay in control of your finances.
      2. return all phone calls and paperwork promptly.
      3. communicate with your agent at least once a week.
      4. several days before closing, confirm with your agent that all your documentation is in place and in order.
      5. obtain certified funds for closing.
      6. conduct a final walk-through.

      on closing day, with the guidance of a settlement agent and your agent, you’ll sign documents that do the following:

      1. finalize your mortgage.
      2. pay the seller.
      3. pay your closing costs.
      4. transfer the title from the seller to you.
      5. make arrangements to legally record the transaction as a public record.

      as long as you have clear expectations and follow directions, closing should be a momentous conclusion to your home-searching process and commencement of your home-owning experience.

    8. protect your investment.
      throughout the course of your home-buying experience, you’ve probably spent a lot of time with your real estate agent and you’ve gotten to know each other fairly well. there’s no reason to throw all that trust and rapport out the window just because the deal has closed. in fact, your agent wants you to keep in touch.even after you close on your house, you agent can still help you:

      1. handle your first tax return as a home owner.
      2. find contractors to help with home maintenance or remodeling.
      3. help your friends find homes.
      4. keep track of your home’s current market value.

      attention to your home’s maintenance needs is essential to protecting the long-term value of your investment.

      home maintenance falls into two categories:

      1. keeping it clean: perform routine maintenance on your home’s systems, depending on their age and style.
      2. keeping an eye on it: watch for signs of leaks, damage, and wear. fixing small problems early can save you big money later.

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  • how can a real estate agent help me?

    seven main roles of your real estate agent

    a buyer’s real estate agent:

    1. educates you about your market.
    2. analyzes your wants and needs.
    3. guides you to homes that fit your criteria.
    4. coordinates the work of other needed professionals.
    5. negotiates on your behalf.
    6. checks and double-checks paperwork and deadlines.
    7. solves any problems that may arise.

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  • creating your home wishlist

    before the home search begins, your real estate agent will want to know as much as possible about the features and amenities you desire. to help your agent better serve you, analyze what you want and what you need in a home’s features and amenities.

    features:

    • age: do you prefer historic properties, or newer ones?
    • style: do you have a special preference for ranches, bungalows, or another style of construction?
    • bedrooms: how many?
    • bathrooms: how many? are they updated?
    • living and dining areas: a traditional, formal layout, or a more open, contemporary plan?
    • stories: how many?
    • square feet: how much space?
    • ceilings: how high?
    • kitchen: how big? recently updated? open to other living areas?
    • storage: big closets, a shed, an extra-large garage?
    • parking: a garage or carport? room for how many cars?
    • extras: attic or basement?

     

    amenities:

    • office
    • play/exercise room
    • security system
    • sprinkler system
    • workshop/studio
    • in-law suite
    • fireplace
    • pool
    • hot tub
    • sidewalk
    • wooded lot
    • patio, deck, or porch
    • laundry room

     

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  • location, location, location

    where you buy not only affects the home’s current and future value, but it also affects your lifestyle. your agent will be able to conduct a more targeted home search if you outline your preferences in neighborhoods and nearby amenities. here’s a checklist of items you should consider and communicate to your chosen real estate agent.

    • urban, suburban or rural
    • commute time
    • school districts
    • desirable neighborhoods
    • proximity to the airport
    • proximity to restaurants and retail
    • access to major highways and thoroughfares
    • access to public transportation
    • health care facilities
    • parks and recreation
    • length of time you plan to live in the home (your agent should be knowledgeable about growth trends and projections that could affect your investment.)

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  • seven main roles of your real estate agent

    qualifications are important. however, finding a solid, professional agent means getting beyond the resume, and into what makes an agent effective. use the following questions as your starting point in hiring your licensed, professional real estate agent:

    1. why did you become a real estate agent?
    2. why should i work with you?
    3. what do you do better than other real estate agents?
    4. what process will you use to help me find the right home for my particular wants and needs?
    5. what are the most common things that go wrong in a transaction and how would you handle them?
    6. what are some mistakes that you think people make when buying their first home?
    7. what other professionals do you suggest we work with and what are their credentials?
    8. can you provide me with references or testimonials from past clients?

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  • homebuyer qualifications

    lenders will review your income, debt, and savings information to determine how much money they are willing to lend you towards your home purchase.

    based on your lifestyle and needs, consider how much you are willing to spend on the purchase of a home. you may not be willing to invest as much of your income in buying a house as you can actually afford. see further details below about the kinds of information used by lenders to determine how much house you can afford to buy: income, debt, and housing-related expenses.

    income

    your income is critical in computing how much you can afford to pay (using current lending guidelines) for housing related expenses. your income information is included in the debt ratio calculations. your ability to meet the monthly principal, interest, taxes and insurance payments (piti) and your debt ratio score can impact a lender’s decision to offer you a loan.

    different loan programs have their own rules regarding the percentage of income that can be applied toward monthly house payments. for example, government loan programs such as fha and va have ratios that allow you to apply a higher percentage of your income toward the loan. while conventional loan front-end ratios generally run around 28%, fha allows you to apply 29% and va allows you to apply 41%.

    this means that your monthly loan payment should be no more the 28%, 29%, or 41% of total monthly income, depending on the loan program you use or qualify for.

    debt

    a lender carefully considers your debt obligations when assessing your ability to repay a loan. your debt information is included in the pitio (principal, interest, taxes, insurance payments and other monthly non-housing expenses) and debt ratio calculations. loan programs have different rules regarding the percentage of income that can be applied toward long-term debt. your ability to meet the ratio requirements can impact a lender’s decision to offer you a loan.

    government loan programs such as fha and va allow you to apply a higher percentage of your debt obligations towards the loan. while conventional loan debt ratios generally run around 36%, fha and va allow you to apply 41%. basically, this means that your long-term monthly debt payment plus your monthly loan payment can equal no more than 36% or 41% of total monthly income, depending on the loan program.

    housing-related expenses

    housing-related expenses are another category lenders consider. these expenses often depend on the location and type of home you are buying. these expenses will affect the size of the loan for which you qualify and may be one of the most critical factors in your decision to buy a home. consider how housing-related expenses will impact your budget. the purchase of a home may increase your monthly expenses and reduce the amount of money you have remaining for other expenditures.

     

    typical home expenses include:

    • property tax – this expense is dependent on the location of the home. property taxes vary by county and state. as a homebuyer, consider how this additional expense will impact your total monthly expenses.
    • maintenance costs – this expense includes anything from faucet washers to a new roof or heating system and varies by geographic location, size, and age of home.
    • utility costs – this expense includes items such as electric, gas, water, and heating and air conditioning and varies by geographic location, size, season, and age of home. the type of construction (i.e. gas, electric) may also be a factor in your utility cost estimates.
    • mortgage insurance (if applicable) – this expense can vary by mortgage insurance company, lender, loan product, and loan-to-value percentage of the loan.
    • other costs – these expenses vary depending on the type of home and geographic location. these costs can include:
      • homeowner association fees
      • flood insurance
      • other required property insurance
      • condominium assessment fees and
      • other condominium escrow items.

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  • foreclosure and short sales

    definitions

    foreclosure: procedure whereby property pledged as security for a debt is sold to pay the debt in event of default in payments or terms.

    short sale: short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan. it often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower. both parties consent to the short sale process, because it allows them to avoid foreclosure. (source: wikipedia)

    avoiding foreclosure

    1. don’t ignore the problem.the further behind you become, the harder it will be to reinstate your loan and the more likely that you will lose your house.
    2. contact your lender as soon as you realize that you have a problem.lenders do not want your house. they have options to help borrowers through difficult financial times.
    3. open and respond to all mail from your lender.the first notices you receive will offer good information about foreclosure prevention options that can help you weather financial problems. later mail may include important notices of pending legal action.  your failure to open the mail will not be an excuse in foreclosure court.
    4. know your mortgage rights.find your loan documents and read them so you know what your lender may do if you can’t make your payments.  learn about the foreclosure laws and timeframes in your state (as every state is different) by contacting the state government housing office.
    5. understand foreclosure prevention options.valuable information about foreclosure prevention (also called loss mitigation) options can be found online.
    6. contact a hud-approved housing counselor.the u.s. department of housing and urban development (hud) funds free or very low-cost housing counseling nationwide. housing counselors can help you understand the law and your options, organize your finances and represent you in negotiations with your lender, if you need this assistance. call (800) 569-4287 or tty (800) 877-8339.
    7. prioritize your spending.after healthcare, keeping your house should be your first priority.  review your finances and see where you can cut spending in order to make your mortgage payment.  look for optional expenses–cable tv, memberships, entertainment–that you can eliminate. delay payments on credit cards and other “unsecured” debt until you have paid your mortgage.
    8. use your assets.do you have assets–a second car, jewelry, a whole life insurance policy–that you can sell for cash to help reinstate your loan? can anyone in your household get an extra job to bring in additional income?  even if these efforts don’t significantly increase your available cash or your income, they demonstrate to your lender that you are willing to make sacrifices to keep your home.
    9. avoid foreclosure prevention companies.you don’t need to pay fees for foreclosure prevention help–use that money to pay the mortgage instead. many for-profit companies will contact you promising to negotiate with your lender. while these may be legitimate businesses, they will charge you a hefty fee (often two or three month’s mortgage payment) for information and services your lender or a hud-approved housing counselor will provide free if you contact them.
    10. don’t lose your house to foreclosure recovery scams!if any firm claims they can stop your foreclosure immediately and if you sign a document appointing them to act on your behalf, you may well be signing over the title to your property and becoming a renter in your own home! never sign a legal document without reading and understanding all the terms and getting professional advice from an attorney, a trusted real estate professional, or a hud-approved housing counselor

     

    tax ramifications

    if a lender forecloses on my principal residence or agrees to a short sale, will I owe tax on the deficiency?

    generally, when there is either a foreclosure or a short sale a taxpayer will receive either (in some cases the lender may issue both) a federal form 1099-a, acquisition or abandonment of secured property, or form 1099-c, cancellation of debt, that provide the amount of debt cancelled, information to compute gain or loss, and whether the taxpayer is personally liable for the debt.

    if you borrow money from a commercial or private lender and the lender later cancels or forgives the debt, you may have to include the canceled amount in income for tax purposes, depending on the circumstances. in a short sale, the lender agrees to accept less than full payment, and cancels the unpaid amount.

    the most common situations when a foreclosure or a short sale does not result in cancellation of debt (cod) income involve a non-recourse loan. a non-recourse loan means the lender’s only remedy in case of default is to repossess the property the lender cannot pursue you personally in case of default. a purchase money loan (that is, a loan taken to “purchase” your home) is generally considered to be a non-recourse loan in california. refinances, second mortgages, and “cash out” loans are generally recourse loans.

    although forgiveness of a non-recourse loan resulting from either a foreclosure or a short sale does not result in cod income, it may result in other tax consequences, like a reportable gain from the disposition. even if the debt discharged is non-recourse, a taxpayer may have a gain to the extent the balance of the mortgage forgiven exceeds their adjusted basis of the property.

    the gain, if any, from the foreclosure or short sale may or may not be taxable, depending on whether irc section 121 applies and the amount of the gain. irc section 121 only applies to principal residences, and limits the amount of gain that can be excluded from income.

    if the loan is a recourse loan, then depending on the facts, you may have cod income, and potentially a reportable gain, in which case you would want to determine if one of the provisions in irc section 108 would apply, allowing the cod income from the discharge of indebtedness to be excluded.

    what is cancellation of debt?

    if you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. when you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. when that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. the lender is usually required to report the amount of the canceled debt to you and the irs on a form 1099-c, cancellation of debt.

    here’s a very simplified example. you borrow $10,000 and default on the loan after paying back $2,000. if the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

    is cancellation of debt income always taxable?

    not always. there are some exceptions. the most common situations when cancellation of debt income is not taxable involve:

    • bankruptcy: debts discharged through bankruptcy are not considered taxable income.
    • insolvency: if you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you.you are insolvent when your total debts are more than the fair market value of your total assets.insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.
    • certain farm debts:if you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.the rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception.
    • non-recourse loans:a non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral.that is, the lender cannot pursue you personally in case of default.forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.however, it may result in other tax consequences, as discussed in question 3 below.

    i lost my home through foreclosure.  are there tax consequences?  

    there are two possible consequences you must consider:

    • taxable cancellation of debt income.(note: as stated above, cancellation of debt income is not taxable in the case of non-recourse loans.)
    • a reportable gain from the disposition of the home (because foreclosures are treated like sales for tax purposes).(note: often some or all of the gain from the sale of a personal residence qualifies for exclusion from income.

     

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  • property taxes and mello-roos

    the mello-roos act provides local governments with a powerful financing tool which allows public facilities to be installed concurrently with development, while isolating the costs of doing so to the developing area. mello-roos financing allows public facilities in developing areas to be installed quickly and limits the financial liability for the bonds to landowners. mello-roos bonds have financed the construction of needed public improvements such as schools, roads, freeway interchanges, sewage treatment plants, and a host of other public facilities.

    local governments need to exercise caution in their use of mello-roos financing as land-backed securities are inherently risky and may pose an excessive burden on taxpayers when coupled with other taxes and assessments.the act has been used much less extensively in developed areas due to the difficulty of obtaining two-thirds voter approval.

    history of the act

    in order to appreciate the role that mello-roos act plays in financing growth, it is important to understand the relationship between growth and capital financing in california and how that relationship has evolved over time. for many years during california’s post-world war ii population boom, the federal and state governments heavily subsidized the construction of public facilities, particularly those which produced statewide or regional benefits. at the local level, the increased service demands caused by growth often overwhelmed existing governmental structures, leading to the establishment of new governmental entities. from a fiscal perspective, the demands for service translated into higher local property tax rates.

     

    the constitutional restrictions on taxation imposed by proposition 13, coupled with declining levels of federal assistance, required local governments to devise new strategies for financing capital projects. cities and counties began to rely more on their legal authority to require developers to pay for infrastructure as a condition of development approval. developer fees emerged as an important source of revenue for school facility needs, as well. local governments also rediscovered the special assessment acts, which had been used sparingly since the great depression.

     

    but these funding sources could only be used under restrictive conditions. special assessments could finance improvements which confer a special benefit to identifiable properties; but they could not be used to finance facilities which confer communitywide benefits, such as schools and police stations. developer fees were constrained by the inherent limitations of a “pay-as-you-go” revenue source. the need for a more flexible local revenue source led to the enactment of the mello-roos community facilities act of 1982.

    review of the mello-roos act

    the special tax authorized by the mello-roos act may be used to finance the construction, expansion, rehabilitation, or acquisition of any real or other tangible property with an estimated useful life of five years or more. the legislative body creating the cfd is permitted to finance any facility it is authorized by law to construct, own, or operate. the special tax may also finance a limited number of services such as police and fire protection services, as long as the special tax is not used to supplant services already provided.

    public policy

    the special tax authorized by the mello-roos act may be used to finance the construction, expansion, rehabilitation, or acquisition of any real or other tangible property with an estimated useful life of five years or more. the legislative body creating the cfd is permitted to finance any facility it is authorized by law to construct, own, or operate. the special tax may also finance a limited number of services such as police and fire protection services, as long as the special tax is not used to supplant services already provided.

    while there are many public policy issues, they can be broken down into a few general categories: expenditure issues, taxation issues, housing affordability issues, and school finance issues.

    expenditure issues. there are three key expenditure issues related to the use of landowner-approved mello-roos financing:

    • growth and congestion. the prevalence of congested public facilities in california suggests that traditional political processes have not been successful in developing policies to address the impacts of growth on public service levels. the landowner vote permits local officials to make decisions, early in the development process, about the mix of taxes and service levels to be provided to developing areas of their communities.

     

    • level of service standards. in order to effectively mitigate the impacts of growth on public service levels, some objective system is needed for measuring the likely impacts of individual development projects. the establishment of level of service (los) standards for individual program areas permits local officials to generate cost information that can be used for negotiating developer exactions and/or sizing mello-roos bond issuances.

     

    • concurrency. landowner-approved mello-roos financing can help localities implement a policy of concurrency, which describes the requirement that sufficient capacity be added to the public capital stock, at the time development occurs, to accommodate the additional demands of growth. in essence, landowner-approved mello-roos financing permits landowners to borrow against the value and tax capacity of their land through the tax-exempt market to pay for the infrastructure needed to serve development. it is the only feasible method of raising a large sum of capital early in the development process to finance the construction of virtually any public facility, while isolating the cost of doing so on the developing area.

    taxation issues. the mello-roos act provides little guidance regarding the apportionment of the special tax to individual properties, other than to establish the general principle that all properties in the cfd must benefit from the proposed improvements. the act leaves the rate and method of apportionment of the special tax to the discretion of the local agency approving the levy. the only constraint is that the special tax cannot be an ad valorem property tax as prohibited by article xiii a of the state constitution (proposition 13). a tension exists between the objectives of designing an equitable or fair tax structure and designing a stable tax structure. local officials must balance these competing objectives in the design of special tax formulas.

    • tax equity. the objective of tax equity is best served when individual taxpayers pay only for the benefit that they receive from expenditures financed by the cfd. applying the benefit principle to the design of cfd boundaries requires the identification of the geographic region that will benefit from the proposed improvements. for cfds formed on undeveloped land, that area typically encompasses the properties slated for residential, commercial and industrial development. applying the benefit principle to the design of special tax formulas requires that similar properties be treated as equally as possible.

     

    • tax base stability. the objective of tax base stability is best served by a tax structure that generates a predictable and sufficient stream of revenues. a tax base formed on undeveloped land docs not afford the stability of a tax base formed on developed land. the mello-roos act provides several features to improve the security of the tax structure: the ability to capitalize up to two year’s interest payments into the bond issuance; the ability to tax developed and undeveloped land at different rates; and the ability to generate debt service coverage of greater than 1.0. these features tend to shift the responsibility for tax payments to those who are most likely to pay: the homebuyer, for residential properties; or the businessperson, for commercial and industrial properties.

    housing affordability issues. the housing affordability advantages of mello-roos financing are difficult to surmise on a case-by-case basis. under certain assumptions, mello-roos financing may result in lower housing prices, translating into a lower downpayment requirement for buyers. the annual savings will be influenced by the tax-exempt interest rate on the special tax bonds and the transaction costs associated with the bond sale. the strength of the housing market at the time properties are sold will determine the distribution of the special tax burden between the developer and the buyer.

    school finance issues. landowner-approved mello-roos financing provides a pragmatic tool for school districts to meet the service demands generated by large-scale development projects. however, the isolation of school construction costs over an area the size of a typical cfd raises equity concerns. a broader participation in school facility finance may be justified by the benefits that accrue to society from an educated populace. moreover, the disparate distribution of cfds throughout the state might result in inequitable tax burdens and uneven levels of school construction activity. the two-thirds voter approval requirement is a barrier to the widespread use of mello-roos financing for school districts in developed areas of the state.

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  • tips for home improvement - hiring contractors

    hire only licensed contractors.
    check a contractor’s license number online.

    do your homework!
    it’s a smart idea to get at least three bids from different contractors.

    see the results!
    get three references from each bidder and take the time to visit and review past work in person.

    get it in writing!
    make sure all project expectations are in writing and only sign the contract if you completely understand the terms.

    are they covered?
    confirm that the contractor has workers’ compensation insurance for his or her employees.

    how much up front?
    never pay more than 10% down or $1,000, whichever is less. don’t pay in cash and never let payments get ahead of the work.

    you’re the boss!
    it’s a good idea to keep a job file of all papers relating to your project, including all payments.

    pay for what you get!
    don’t make the final payment until you’re satisfied with the job. final payments mean just that! it’s done.

     

    finding a contractor

    always take the time to evaluate the contractor who may be doing the job.

    talk to building officials. be particularly cautious when selecting a contractor to repair your chimney. not everyone is qualified to repair or rebuild a chimney. it takes specialized skill and training.

    the state department of labor and industries (l&i) recommends the following steps when hiring a contractor:

    • be wary of contractors soliciting business door-to-door.
    • ask contractors if they have done this type of repair work before, if they will be purchasing necessary permits, and if the work will be inspected.
    • determine if a contractor, electrician or plumber is registered or licensed. all contractors doing business in the state are required to register. while not a guarantee of performance, registration does mean the contractor has minimal liability insurance and a surety bond that can protect the consumer if there is a problem.
      for information, call l&i’s toll-free number 1-800-647-0982. the caller can also find out how long the contractor has been in business and whether there have been any complaints against the bond.
    • try to get three separate bids on the job.
    • ask for references.
    • obtain a written contract.
    • be cautious in dealing with a contractor who asks for a large down payment.
    • pay the contractor at the end of the job, or pay only for the portion of the job that has been completed.
    • avoid making final payment until you have received a lien release.

     

    additional information to consider:

    • check for a permanent place of business, telephone number, tax i.d. number and business license.
    • look for a company with a proven track record that readily offers client references and a list of completed projects. call these clients to find out whether they were satisfied.
    • check to see if the contractor is a member of any regional or national industry associations.
    • contact your local better business bureau to check for a business report or any complaints that have been filed on a contractor.

     

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  • 10 tips for homebuyers

    1. before you start looking for a home, get pre-qualified for a loan. banks, credit unions and mortgage bankers make home loans; mortgage brokers process them. the lenders will take an application, process the loan documents, and see the loan through to the funding stage.

    2.if you have marginal or bad credit, consult your lender. you may be able to qualify for a loan depending on how long ago and what reason(s) caused the bad credit. a lender should be able to advise you on whether your credit history will prevent you from qualifying for a home loan.

    3. you will need a down payment. down payment requirements vary depending on the type of loan. many down payment assistance programs exist. these programs may loan or grant you the funds necessary for the down payment. consult with a lender about programs available in your area.

    4. you will need funds for closing costs closing costs are charges for services related to the closing of your real estate transaction. they include, but are not limited to:

    • escrow fees charged by the company handling the transaction
    • title policy issuance fees charged by the title insurance company
    • mortgage insurance fees
    • fire and homeowners insurance
    • county recorder fees for recording your deed
    • loan origination fees

     

    consult your lender for an actual estimate of these costs, as well as information about loan programs which can assist in financing your closing costs

    5. some loans have “points” and some do not. a point is a loan origination fee equivalent to 1% of the loan amount. together with the interest rate they constitute the yield on your loan for the lender. some lenders charge a higher interest rate to compensate for charging no points. it is important to comparison shop lenders to make sure your loan is at a competitive yield.

    6. should you select a mortgage with a fixed rate or an adjustable rate? the answer to this question depends on whether mortgage rates are at a high or a low point when you purchase, and on how long you plan to live in the home. if rates are high, an adjustable rate might be attractive since subsequent rate drops could reduce your monthly payments. additionally, lenders may offer a low rate during the first few years of an adjustable mortgage to make it appealing to you. if interest rates are low you might want to take a fixed rate to protect yourself against the possibility of rising interest rates.

    7. be aware of the two main types of loan categories.

    • conventional loans. conventional mortgage loans are available with fixed or adjustable interest rates. some loans may require mortgage insurance.
    • government loans. these include federal housing administration (fha) fixed and adjustable rate mortgage loans, and veterans administration (va) fixed rate mortgage loan

     

    8. if you are a low or moderate income homebuyer, there are special programs designed to help you. these loans are available through private lenders, as well as local and state housing agencies, like the california housing finance agency (calhfa). most lenders specializing in real estate mortgage loans are aware of these types of loan programs.

     

    9. why might i have to pay mortgage insurance? mortgage insurance protects the lender from potential loss if you should default on your mortgage loan payment. generally, conventional loans that require larger down payments do not require mortgage insurance. mortgage insurance is always required on fha mortgage loans.

    10. many organizations offer home loan counseling to prospective homebuyers.these organizations provide classes for homebuyers to cover the steps to homeownership. they will cover home selection, realtor services, lenders, loan programs, homeownership responsibilities, saving for a down payment, and other important pieces of information. many first-time homebuyer programs require homebuyers to attend this type of class to be eligible for selected programs.

     

     

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  • advice for buyers

    buying a home requires you to make an intelligent and informed decision. be objective! buying a home is both an emotional and business decision. try to make a sensible evaluation of all factors before proceeding with an enormous commitment of time and financial resources.

    representation by an experienced real estate professional is the best way to avoid mistakes in purchasing a home.  hire a real estate agent that exclusive represents you as a buyer to avoid potential conflicts of interests.

    owning vs. renting

    • benefits of renting — more flexibility in length of occupancy and location of residence, landlord is responsible for most repairs and maintenance
    • benefits of ownership — build equity through gradual principal reduction and appreciation, tax advantage of being able to deduct mortgage interest and property taxes from income taxes. tax benefits alone may make more financial sense than renting depending on your income level and tax bracket. if you rent your rent may be increased over time, but if you finance your home with a fixed interest rate loan then your payment will remain exactly the same for the term of the loan, usually 30 years.

     

    determine your needs

    • narrow your search by separating reality from fantasy
    • create a basic requirements list of true needs and a wish list of wants
    • needs = number of bedrooms and bathrooms for size of family, one story house if accessibility is a factor, good schools for children, enough parking for vehicles
    • wants = pool, updated design, large rooms, extra space, fancy landscaping, etc.

     

    start with financial capability

    • mortgage lenders will want to review your credit report
      • equifax, experian, and trans union sell your credit report to banks so they can review your loan applications
      • credit score
      • indicates your ability and willingness to repay a debt based on your record
      • your credit score will be an important factor in determining whether you are approved for a loan
    • mortgage brokers will help you find a loan that you qualify for
    • a written pre-approval letter from a lender will impress a seller and help avoid the disappointment of trying to purchase a home that you cannot a afford. costs for pre-approval are generally low and are often included in closing costs.

     

    building your credit

    • pay your bills on time
    • always pay at least the minimum balance due
    • keep overall balance low
    • don’t apply for too many loans or credit cars

     

    can you afford this house?

    • down payment – generally ranges from 3% to 20% of the purchase price. if you put less than 20% down, then you may be required to have private mortgage insurance (pmi)
    • homeowner’s insurance
    • closing costs – generally range from 2% to 7% of the purchase price. it includes points, taxes, title insurance, financing fees, escrow fees, and other settlement costs. the lender will give you an estimate of total costs after you are approved.
    • moving costs
    • purchase of major appliances and other home furnishings

     

    organize your search

    • highlight maps of area of interest
    • keep a file of properties of interest
    • use a pen and notepad as you search
    • use a digital camera and/or video camera to take many photos of properties and neighborhood
    • learn as much as possible about your area of interest: school info, crime statistics, shopping, parks & recreation, transportation, employment, politics, and any other info that will be pertinent to life in your future home.

     

    making an offer and closing escrow — your real estate agent should guide you through most of this process, but be aware of the following:

    • include inspection and financing contingencies in written offer
    • have home inspected by professional inspector
    • request a second walk through prior to the close of escrow to make certain no major changes have taken place

     

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  • choosing the right home for you

    there are many factors to consider when looking for a home. listed below are some of the factors.

    types of homes — there are many different types of homes: single-family, condominium, townhouse, and duplex. additionally, the type of home you select may impact your buying power.

    new or existing home — consider whether you want to move into a new home or an existing home. in general, new homes are more costly than existing homes. however, the condition of an existing home can significantly increase your maintenance requirements.

    quality of home — examine the condition of the home. carefully inspect the structure, interior and exterior of the house for defects. the additional renovation costs may add up over time and exceed your maintenance estimates. will the house need a lot of repairs? how old are the appliances? the purchase of the home is one step, but the renovations and repairs are added costs that need to be considered. would you prefer to purchase a newer, costlier home or would you prefer to invest additional time and money into renovations and repairs for an older, less expensive home?

    features — consider the features of the home. does it have gas or electric heating? how many bathrooms does it have? how many bedrooms do you need? all of these characteristics will influence the price of the home and your monthly housing expenses.

    location — would you rather live in the city, the country, or the suburbs? do you want to be near parks or the library? what about a shopping center? is it important for you to be near major highways or public transportation? get a feel for the surrounding area by exploring the neighborhood and talking to residents.

    crime rate — look into the safety of the neighborhood. does the neighborhood have a high crime rate? has there been an increase in crimes committed in the area? if so, how will this influence the future property value of your home?

    school system — the quality of the school system in a particular area is not only important to families with children but can influence the property value of your home.

    economic stability of area — the economic growth and stability of the area surrounding a home can influence its future property value.

    property tax — examine the annual amount of real estate taxes and other assessments levied on homes in the neighborhood you are considering.

     

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  • the negotiation process

    when you have found the home that best meets your needs, you are ready to make an offer on the house. in most cases your real estate agent will present your offer to the seller. do not be discouraged if your first offer is rejected by the seller. it is not uncommon for the seller to make a counter-offer.

    once the selling price has been agreed upon by both the buyer and seller, a purchase contract is started. in most cases, your real estate agent will help you negotiate the terms of the purchase contract. the purchase contract is a legal contract that details the final terms for the purchase of the home including price, closing date, and estimates on the closing costs. by signing the purchase contract, it means you have agreed to purchase the property under the negotiated terms and price. although some closing cost fees are required by law, you can negotiate others as part of the purchase offer.

    what’s included in closing costs?

    closing costs typically average approximately 5-10% of the house price. this percentage may vary, depending on where you live. in general, your closing costs will include the following items:

    • lender fee – typically paid by the seller to cover the lender’s expenses for processing the loan.
    • title insurance – based on the sale price of the home. the percentage of sale price varies by title insurance company. it is the fee charged for property title inspection and insurance policy against policy defects. this will require coverage for both the lender and the buyer’s guaranties.
    • title search fee – fee charged for examining the public record, laws, and the registry of deeds to ensure that no individual other than the seller can legally claim ownership of the property.
    • state mortgage taxes – fee charged by the state as a tax on the sale of the home.
    • settlement charge - fee charged by the closing company to cover attorney fees and other expenses incurred.
    • escrow – items for which the lenders require escrow accounts, as they are not monthly fees. companies usually require two months in escrow at closing. federal, and in some cases, state law dictate the amount of funds that must be held in your escrow account at all times. your realtor or lender can help ascertain these amounts. items that typically require escrow accounts include:
      • hazard insurance – fee charged for insuring the property against property loss or damage.
      • property tax – fee charged for the property that is based on the assessed value of the property. the tax rate can vary by county.
      • mortgage insurance – fee required by lenders to insure against the risk of default by the borrowers. this is usually required if the down payment is less than 20% of the mortgage amount.
    • settlement or closing fee – fee charged to cover the services of the settlement agent that handles all the payment transfers during the closing.
    • attorney’s fee – fee charged if an attorney performs the functions of a settlement agent. in some states, it is required that an attorney be involved with the closing process.
    • flood insurance fee – fee charged to determine if the property is in a special flood hazard area.
    • home warranty fee – fee charged by an insurance company for a warranty that covers repairs or replaces defective items in the home.
    • home inspection fee – fee charged for professional inspection of the house to identify any problems associated with the home.
    • survey fee – fee charged for measuring the property to document location, dimensions, and any construction improvements of the property.
    • notary fee – fee charged to cover cost of a licensed notary individual authorized by the state to certify the identity of the individuals signing the documents.
    • recording fee – fee charged for filing closing documents such as your deed of trust at the county recorder’s office.
    • interest – prorated fee charged daily for mortgage interest due from the date of funding until the time of the first monthly mortgage payment.
    • lender fees/charges
      • discount points – finance charges calculated by the lender at closing. each point is equal to 1% of the loan amount which is paid at closing. this fee is sometimes charged by the lender to reduce the interest rate of the mortgage, also referred to as a “buydown”. one discount point typically reduces the loan rate by an eighth of a percentage point. for example, if the interest rate is 7.5%, you may end up paying 7.25% over the life of the loan and pay the difference in additional up-front costs equivalent to 2 discount points. discount points are based on the total loan amount and can vary by lender and by lender’s loan products.
      • loan origination fee – based on loan amount; typically this fee is 1% of the loan amount.
      • mortgage interest – the interest on the loan amount from the date of closing to the last day of the month.
      • credit report fee – fee charged by lender to request a credit report on the borrower. this fee varies by location and reporting agencies.
      • appraisal fee – fee charged for a written evaluation of the fair market price for the property. this fee varies by lender.
      • tax service fee – fee charged by the lender to cover the cost of hiring a tax service agency. a tax service agency monitors the property tax payments for the loan and informs the lender if they are not paid in full and on time. if property taxes are included in the monthly payment as part of the escrow account, the tax service will obtain the tax bills for payment by the lender.
      • document preparation fee – fee charged to cover the cost of preparing the loan documents.

     

    who pays for what?

    there are no definitive rules on who pays which closing costs. the buyer and the seller usually negotiate who pays certain closing costs. for instance, the seller may be willing to negotiate full or partial payment of appraisal fees, loan points, credit report request, and inspection fees. usually the seller is responsible for the brokerage fees, as this is compensation to the real estate agents for their roles in the sale of the home.

    earnest money – typically required as part of the purchase contract, earnest money provides a “good faith” deposit and secures the sale agreement. this deposit is usually a portion of the purchase price. this deposit shows that the buyer is serious about purchasing the house. earnest money is held in an escrow account for the buyer and can be applied toward the down payment or closing costs. in some cases, the buyer must pay the deposit in cash.

     

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  • steps to home purchase

    Should I Buy A Home?
    In addition to providing you with a place to live, owning a home can provide you with a possible investment for many reasons including potential equity growth, the stability that comes with having ownership in a community, and possible tax advantages.

    Renting might make more sense for a mobile lifestyle or if you may need to move because of a job change or other factors. If you do not foresee staying in your home for several years, the amount of equity that you build up over the first year or two may be lost through selling costs and real estate commissions.

    Can I Afford to Buy A Home?
    Normally, you need to have enough savings to cover a down payment of 5% to 20% of the purchase price plus an additional 3% to 7% of this price for closing costs. If you do not have the down payment, you may be able to qualify for a loan under various government programs that are available.

    Before you begin looking for a home decide what you want and can afford. Various factors are considered when a lender qualifies a purchaser for a home purchase including credit history, job stability and the size of the down payment. Prior to shopping for a home you may wish to visit a respected lender to determine the loan you can afford.

    Selecting an Agent
    Before you select an agent, do your homework. Interview several real estate agents to determine their level of experience in the area you wish to purchase. Check to ensure that the agent is properly licensed. Review any disciplinary actions that may be reflected on the licensee record and assess whether or not that information is important to you in your selection of an agent. Also, ask the agents for the names of past clients and check their references.

    Finding Your Home
    Before you look for a home, you should determine the features that you need such as the location, number of bedrooms, size of the lot and proximity to stores, schools, hospitals, work and other services such as fire and police protection. You should also determine if there are any special taxes, assessments or homeowners association dues that could affect your monthly expenses.

    Inspecting the Home
    Once you find a house that meets your specific needs, you should check the electrical, plumbing and structural integrity of the property. Consider hiring a qualified inspector to evaluate the structural aspects of the home you are considering purchasing. By doing this, you are giving yourself the opportunity to negotiate any necessary repairs with the seller. Under any circumstances, buying a home requires maintenance and sometimes unexpected expenses for repairs. When you make a decision to buy a home, remember to include this in your budget.

    Presenting an Offer
    Decide what you wish to pay for the property. A good basis for this is to determine what other properties in the neighborhood have sold for. Your real estate agent can be a valuable source for this information.

    Make sure that your offer contains any contingencies or special conditions that you desire in the contract. This would include your need to qualify for a loan, repairs that you want the seller to complete prior to the close of escrow, as well as pest control inspections, home inspections, home warranty programs, and any other specific items. Remember, if your offer is accepted and thus becomes a binding contract, failure to complete the purchase could affect the return of your deposit.

    You should thoroughly review the contract before signing it and make certain that you understand it. If there are portions of the document that you do not understand, you should seek appropriate professional advice. If your real estate agent is unable to adequately answer your questions, you should ask to speak with his or her broker or seek legal advice. Make sure that the offer you sign does not contain any blank spaces that can be filled in after you signed it. Also, avoid giving cash as a deposit or down payment. Instead, always use a check, money order or cashier’s check. This provides a permanent record of the money that you have deposited.

    Disclosures
    There are a number of disclosures that you are entitled to receive during the course of your purchase. Two of the most important disclosures that you should receive in a residential purchase are as follows:

    Real Property Disclosure Statement — This disclosure is completed by the seller and covers the physical condition of the property and potential hazards or defects that may be associated with it. While the seller is principally responsible for the disclosures presented in this document, the agent is also responsible for conducting a visual inspection of the property and disclosing any readily observable defects detected in the process. This document also discloses any special taxes, assessments and other factors that may have a material effect on the value or desirability of the property.

    Agency Relationship Disclosure — Your real estate agent is required to provide you with a written disclosure stating whom he or she represents in the transaction. The agent may represent you as the buyer exclusively, or the seller exclusively, or be a dual agent representing both you and the seller. You should carefully review and understand this disclosure as it has a material effect on the level of responsibilities that your agent owes to you.

    Depending on the location, age and other factors involved with the residential property that you are purchasing, additional disclosures may be required.

    Financing Disclosures – Various financing disclosures are also required in real estate transactions providing you with important details of your loan. In this regard, the two major disclosures required are the Truth in Lending Statement (Regulation Z) and the Real Estate Settlement Procedures Act (RESPA). The Truth in Lending Statement will provide you with important details on the terms and conditions of credit including the amount financed, the finance charge, as well as the annual percentage rate. RESPA requires detailed broker and lender good faith estimates regarding settlement and closing costs to be provided within three days after you apply for a loan. RESPA also requires a HUD Uniform Settlement Statement that provides you with a detailed accounting of actual disbursements and closing costs upon the completion of your loan transaction.

    Public Report – In all common interest facilities which have homeowners association dues, as well as in the initial offering of homes in standard subdivisions located outside city limits, a public report issued by the DRE is required. The public report is a detailed statement, which discloses to prospective buyers pertinent facts about the subdivision. The report includes information about utilities, water, roads, soil, geologic conditions, title, zoning, use restrictions, hazards, and the financial arrangements that have been made for the completion of the subdivision.
    Escrow and Title

    You have a right to negotiate with the seller if you have a preference as to the escrow and title company that will be used in your transaction. The Escrow Company is a neutral third party with the responsibility of protecting the interests of both the buyer and seller. The escrow officer ensures that all terms of the contract as detailed in the escrow instructions have been met and that the appropriate deeds are recorded upon the close of the transaction. The Title Company provides an insurance policy to protect the buyer and the lender against any unknown defects with respect to the title to the property. Normally, the lender will require a title insurance policy as a condition of the loan.

    Conclusion
    A real estate transaction can be complex and involves many parties and documents. When purchasing a home, you as the buyer should do your homework, be sure to read all documents involved in the transaction and seek professional advice in the event that you do not fully understand any aspect of your transaction.

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  • home improvement - hiring contractors

    hire only licensed contractors. check a contractor’s license number online.

    do your homework! it’s a smart idea to get at least three bids from different contractors.

    see the results! get three references from each bidder and take the time to visit and review past work in person.

    get it in writing! make sure all project expectations are in writing and only sign the contract if you completely understand the terms.

    are they covered? confirm that the contractor has workers’ compensation insurance for his or her employees.

    how much up front? never pay more than 10% down or $1,000, whichever is less. don’t pay in cash and never let payments get ahead of the work.

    you’re the boss! it’s a good idea to keep a job file of all papers relating to your project, including all payments.

    pay for what you get! don’t make the final payment until you’re satisfied with the job. final payments mean just that! it’s done.

    finding a contractor

    always take the time to evaluate the contractor who may be doing the job.

    talk to building officials. be particularly cautious when selecting a contractor to repair your chimney. not everyone is qualified to repair or rebuild a chimney. it takes specialized skill and training.

    the state department of labor and industries (l&i) recommends the following steps when hiring a contractor:

    • be wary of contractors soliciting business door-to-door.
    • ask contractors if they have done this type of repair work before, if they will be purchasing necessary permits, and if the work will be inspected.
    • determine if a contractor, electrician or plumber is registered or licensed. all contractors doing business in the state are required to register. while not a guarantee of performance, registration does mean the contractor has minimal liability insurance and a surety bond that can protect the consumer if there is a problem.
      for information, call l&i’s toll-free number 1-800-647-0982. the caller can also find out how long the contractor has been in business and whether there have been any complaints against the bond.
    • try to get three separate bids on the job.
    • ask for references.
    • obtain a written contract.
    • be cautious in dealing with a contractor who asks for a large down payment.
    • pay the contractor at the end of the job, or pay only for the portion of the job that has been completed.
    • avoid making final payment until you have received a lien release.

    additional information to consider:

    • check for a permanent place of business, telephone number, tax i.d. number and business license.
    • look for a company with a proven track record that readily offers client references and a list of completed projects. call these clients to find out whether they were satisfied.
    • check to see if the contractor is a member of any regional or national industry associations.
    • contact your local better business bureau to check for a business report or any complaints that have been filed on a contractor.

     

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  • mortgages explained

    fixed-rate vs. adjustable rate

    fixed-rate mortgage

    fixed-rate mortgage applies the same interest rate toward monthly loan payments for the life of the loan. fixed-rate mortgages are more straightforward and easier to understand than adjustable rate mortgages (arms), are more secure for the buyer, and are popular with first-time homebuyers. since the risk to the lender is higher, fixed-rate mortgages generally have higher interest rates than arms.

    for example, a lender can offer a 30-year fixed loan to a homebuyer at a 7.0% interest rate. the loan is locked in to the 7.0% interest rate, even if the market interest rate rises to 9.0%. conversely, if the market interest rate decreases to 5.5%, the borrower will continue to pay the 7% interest rate.

    fixed-rate benefits include:

    • no change in monthly principal and interest payments regardless of fluctuations in interest rates
    • more stability may give you “peace-of-mind”

     

    fixed-rate considerations include:

    • higher initial monthly payments compared to those of adjustable rate mortgages
    • less flexibility

     

    adjustable rate mortgage

    an adjustable rate mortgage (arm) does not apply the same interest rate toward monthly payments for the life of the loan. throughout the life of that loan, the homebuyer’s principal and interest payment will adjust periodically based on fluctuations in the interest rate.

    for example, a lender could offer a 30-year arm loan to a homebuyer at an initial 6.5% interest rate. during an adjustment period for the arm loan, the market interest rate could rise to 8.0%, resulting in a significantly larger interest payment. similarly, the market interest rate could decrease to 6.0%, resulting in lower interest payments.

    arm benefits include:

    • initial payments lower due to lower beginning interest rate, usually about 2 percentage points below the fixed rate
    • ability to qualify for a higher loan amount due to lower initial interest rates
    • lower interest payments if the interest rate drops over time
    • interest rate caps limit the maximum interest payment allowed for the loan

     

    arm considerations include:

    • initial lower interest rate and monthly payments are temporary and apply to the first adjustment period. typically, the interest rate will rise after the initial adjustment period.
    • higher interest payments if the interest rate rises over time

     

    30-year vs. 15-year mortgage terms

    typically, a 30-year mortgage term will have lower monthly payments than a 15-year mortgage term. if you decide on a 15-year loan, you will pay significantly less in total interest over the life of the loan, but your monthly mortgage payments will be higher. as a homebuyer, you will need to consider the implications of supporting higher monthly payments when accepting a 15-year term.

    rates and points

    the interest rate determines the monthly interest payments over the lifetime of the loan. a “point” or “discount point” is equivalent to 1% of the loan amount and usually reduces or “discounts” the loan rate by an eighth of a percentage point.

    for example: you want to get a loan for $100,000 to buy a home. each “point” would cost you 1% of $100,000 or $1,000 but would reduce your loan’s interest rate by .125%. the lender might offer you an 8.0% loan with zero points, a 7.875% loan with one point, or a 7.75% loan with 2 points.

    points, like the down payment, are paid at closing. in some cases, lenders will allow borrowers to finance the points over the term of the loan. lenders sometimes use points to make their interest rates appear lower. be aware that lower interest rate offered by a lender may translate into higher points requirements.

    should you pay more or less “up-front”?

    the size of the down payment, money paid at closing, can affect your mortgage in a number of ways.

    higher up-front payments result in:

    • lower monthly payments
    • lower private mortgage insurance (pmi) costs (if applicable)
    • lower interest payments

    in fact, making a down payment of 20% or more can save the homebuyer money by avoiding the monthly mortgage insurance payments.

    on the other hand, lower up-front costs mean that your cash requirements at closing are much less, although monthly payments may be somewhat higher.

    these lower up-front costs may be a significant benefit for first-time homebuyers and people who simply don’t have a lot of cash on hand.

    buydown vs. gpm

    while these two mortgage types start the homebuyer off at one rate and increase the rate over time, one of these types of mortgages may be right for you:

    buydown

    – type of mortgage loan where the loan rate is reduced by paying more up-front at closing and is increased by one percent each year for the period set for the loan product. for example: for a 2-1 buydown at an 8% rate, year 1 the rate is 6%, year 2 the rate is 7%. for year 3 through the life of the loan, the rate is 8%.

    qualification rules for the loan programs remain the same. depending on the lender, the buyer may qualify using the reduced rate. (example: for a 3-2-1 buydown at a rate of 8%, the buyer could qualify using the 5% rate.)

    the difference between the actual payment schedule and the rate schedule is usually paid “up-front” at closing. this can be paid by the seller, the buyer, the homebuilder, or in some cases, the lender. if the cost is borne by the lender, it is usually offset with increased rates or in points. generally the funds used to buy down the loan are held in a separate account and are applied with the borrower’s payment to equal the true interest rate.

    graduated payment mortgage (gpm)

    – type of mortgage loan where the mortgage payments increase gradually for a period established in the loan product, typically five years. this is a negatively amortizing loan, which means that the difference between the interest paid and the interest due is deferred and added to the loan balances. because of this, your loan amount will increase once you start paying off the loan; it will amortize normally at the end of the loan period. these loan products are more popular when the interest rates are higher, providing a financial incentive for potential buyers.

    since many lenders will qualify a buyer at a lower rate, a buyer can secure a larger mortgage. these loan types are good for those buyers who expect their incomes to increase to cover the increase in loan amount.

     

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  • understanding your mortgage statement

    mortgage statements come in many different forms. however, most contain similar terms and information. here are some commonly used terms and their definitions that may help you better understand your mortgage statement.

    adjustable-rate mortgage (arm) — a mortgage loan with an interest rate that is subject to change and is not fixed at the same level for the life of the loan. these types of loans usually start off with a lower interest rate but can subject the borrower to payment uncertainty.

    amortization — the process of paying off a debt by making regular installment payments over a set period of time, at the end of which the loan balance is zero.

    balloon mortgage — a mortgage loan that requires a large payment due upon maturity (for example , at the end of ten years).

    collections — the efforts a lender takes to collect past due payments.

    convertible arm — is an adjustable rate mortgage loan that can be converted into a fixed-rate mortgage during a certain time period.

    deed — a legal document under which ownership of a property is conveyed.

    deferred payments —loan payments that are authorized to be postponed as part of a workout process to avoid foreclosure.

    delinquency — failure to make a payment when it is due. a loan is generally considered delinquent when it is 30 or more days past due.

    equity — ownership interest in a property after liabilities are deducted.

    escrow account —an account where a homeowner’s regular installments to cover taxes and home insurance are held in trust until due.

    escrow analysis — a periodic review of escrow accounts to make sure that there are sufficient funds to pay the taxes and insurance on a home when they are due.

    fixed-rate mortgage — a mortgage loan with a fixed interest rate that remains the same for the life of the loan.

    forbearance — the lender’s postponement of legal action when a borrower is delinquent. it is usually granted when a borrower makes satisfactory arrangements to bring the overdue mortgage payments up to date.

    foreclosure — the legal process by which a property may be sold and the proceeds of the sale applied to the mortgage debt. a foreclosure occurs when the loan becomes delinquent because payments have not been made or when the borrower is in default for a reason other than the failure to make timely mortgage payments.

    foreclosure prevention — steps by which the servicer works with the borrower to find a permanent solution to resolve an existing or impending loan delinquency.

    hazard insurance — insurance that is generally required under mortgage contracts to pay for loss or damage to a person’s home or property.

    home equity line of credit — a way of borrowing money against the equity in one’s home to pay for things such as home repairs, college education, or other personal uses.

    interest-only mortgage — a mortgage where the borrower pays only the interest and none of the outstanding principal balance on a loan for a specified amount of time.

    investment property — a property not considered to be a primary residence that is purchased in order to generate income, profit from appreciation, or take advantage of certain tax benefits.

    lender placed insurance — insurance placed on a home or property by a lender to protect their interest in the collateral which secures the loan.

    mortgage insurance — insurance that protects lenders against losses caused by a borrower’s default on a mortgage loan. mortgage insurance (or mi) typically is required if the borrower’s down payment is less than 20% of the purchase price.

    mortgage — a legal document that pledges property to a lender as security for the repayment of the loan. the term is also used to refer to the loan itself.

    refinance — the process of replacing an existing mortgage with a new one by paying off the existing debt with a new, loan under different terms.

    repayment plan — a borrower promises to pay down past due amounts on a mortgage while continuing to make regular monthly payments on a home.

    servicer — a firm that works on behalf of the lender in support of a mortgage, including collecting mortgage payments, ensuring payment of taxes and insurance, managing escrow accounts, managing communications with the borrower, and loss mitigation or foreclosure when necessary.

    title — the documented evidence that a person or organization has ownership of real property.

    work out — a way to resolve or restructure a loan to prevent someone from going into foreclosure through a loan modification, forbearance or short sale.

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  • introduction to refinancing

    refinancing involves paying off your current mortgage and replacing it with a new mortgage. it often involves many of the same steps and expenses that were required when the original mortgage was obtained.

    the most common reason to refinance is to lower monthly mortgage payments, but there are other reasons to consider refinancing.

    reasons to refinance

    lower the monthly payment: if interest rates have dropped, refinancing may lower your mortgage payment. this is the primary reason people refinance.

    reduce the term (length) of the mortgage: a drop in interest rates may allow you to shorten the amount of time you pay the mortgage but leave the mortgage payment about the same.

    reduce the risk on an adjustable rate mortgage (arm): an arm mortgage may have enabled you to afford your home but if the interest rate has increased significantly, evaluate a fixed-rate alternative. the risk of further interest rate increases is then eliminated.

    use the home’s equity: as an alternative to a home equity loan, you may elect to refinance your home for an amount greater than the remaining balance of your mortgage. this is known as a “cash out” loan.

    consolidate debts: an owner with outstanding loans or credit card balances that have high interest rates can consolidate these loans into one new mortgage.

    should you refinance?

    whether or not to refinance depends on your own personal financial situation. there are many mortgage options available — examine each option thoroughly. depending on your situation, the best option may be to do nothing at all.

    points to consider:

    do you have the funds that refinancing may require to cover up-front costs and fees?
    refinancing your mortgage may require you to pay substantial up-front costs and fees. if you do not have enough money to pay the up-front costs completely it may be possible to finance some of the up-front costs by including them in the new mortgage.

    how long will it take to recover the costs of refinancing?
    the rule of thumb is that refinancing costs are recovered within 2-3 years. if you plan to sell the house or pay it off shortly, you may not want to refinance because you will not recover the costs. obviously, this depends on the up-front costs and the savings with the new mortgage.

    has your income increased substantially?
    if your income has increased substantially you may be able to afford higher monthly payments. this may allow you to shorten the term of your mortgage. if the prevailing interest rate is lower for the shorter term mortgage, refinancing is a good option. alternatively, you may prefer to make larger principal payments against your current mortgage.

    is your current loan an adjustable rate mortgage (arm)?
    if the current rates for fixed-rate mortgages are the same or slightly higher than the rate for your arm, refinancing may make sense.

    much thought needs to go into the refinancing decision — re-evaluate this decision regularly to account for changes both in your financial situation and the economy. perhaps your decision is not to refinance now; if it makes since to do so in a few years it may save you thousands of dollars.

     

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  • reverse mortgages

    reverse mortgages are for senior citizens who own homes and want monthly income.

    who qualifies?
    you must be at least 62 years old and have equity in your home.

    you have equity in your home if your home is worth more than you owe on it.

    here’s how it works
    when you bought your home, the bank loaned you the money to buy it and you paid them back with monthly mortgage payments.

    a reverse mortgage is the opposite. with a reverse mortgage, the bank pays you a monthly payment from the equity in your home.

    you repay the money when you sell your home, refinance, permanently move out, or pass away.  at that time, you or your heirs must repay the loan plus interest in one payment.

    how do i get a reverse mortgage?
    reverse mortgages are available through most major banks and lenders.

    here’s what happens when you contact the lender:

    • an appraiser will determine the value of your home.
    • the lender will tell you how much you qualify for based on your age, the equity in your home, and the cost of the loan.
    • you decide how you want to receive the money.  you can receive the money:
      • as a lump sum
      • in monthly payments
      • as a credit line that lets you decide how much of the loan to use, and when to use it
    • you sign a contract. the contract will outline the payments you will receive and the amount you have to repay including interest.

     

    maintaining your reverse mortgage
    to keep your reverse mortagage in good standing you must:

    • pay your property taxes on time
    • maintain and repair your home
    • have homeowner’s insurance

     

    your lender can end the reverse mortgage and require immediate repayment if you:

    • file for bankruptcy
    • rent out part of your home
    • add a new owner to title
    • take a new loan against your property

     

    things to consider
    reverse mortgages are more costly than typical home loans or home equity credit lines. they also have higher interest rates and fees. interest is charged on the outstanding balance and is added to the amount you owe each month. this means that your total debt increases each month.

    keep in mind that you are borrowing equity from your home. this means fewer assets for you and your heirs.

    shopping for a reverse mortgage
    shop around and get offers from several lenders. you should compare the terms, and look for a loan with the lowest interest rate, points and fees.

     

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  • title insurance

    title insurance is usually required by the lender to protect the lender against loss resulting from claims by others against your new home. in some states, attorneys offer title insurance as part of their services in examining title and providing a title opinion. the attorney’s fee may include the title insurance premium. in other states, a title insurance company or title agent directly provides the title insurance.

    owner’s policy.
    a lender’s title insurance policy does not protect you. similarly, the prior owner’s policy does not protect you. if you want to protect yourself from claims by others against your new home, you will need an owner’s policy. when a claim does occur, it can be financially devastating to an owner who is uninsured. if you buy an owner’s policy, it is usually much less expensive if you buy it at the same time and with the same insurer as the lender’s policy.

    choice of title insurer.
    under respa, the seller may not require you, as a condition of the sale, to purchase title insurance from any particular title company. generally, your lender will require title insurance from a company that is acceptable to it. in most cases you can shop for and choose a company that meets the lender’s standards.

    review initial title report.
    in many areas, a few days or weeks before the settlement or closing of the escrow, the title insurance company will issue a “commitment to insure” or preliminary report or “binder” containing a summary of any defects in title which have been identified by the title search, as well as any exceptions from the title insurance policy’s coverage. the commitment is usually sent to the lender for use until the title insurance policy is issued at or after the settlement. you can arrange to have a copy sent to you (or to your attorney) so that you can object if there are matters affecting the title which you did not agree to accept when you signed the agreement of sale.

    coverage & cost savings.
    to save money on title insurance, compare rates among various title insurance companies. ask what services and limitations on coverage are provided under each policy so that you can decide whether coverage purchased at a higher rate may be better for your needs. however, in many states, title insurance premium rates are established by the state and may not be negotiable. if you are buying a home which has changed hands within the last several years, ask your title company about a “reissue rate,” which would be cheaper. if you are buying a newly constructed home, make certain your title insurance covers claims by contractors. these claims are known as “mechanics’ liens” in some parts of the country.

    survey.
    lenders or title insurance companies often require a survey to mark the boundaries of the property. a survey is a drawing of the property showing the perimeter boundaries and marking the location of the house and other improvements. you may be able to avoid the cost of a complete survey if you can locate the person who previously surveyed the property and request an update. check with your lender or title insurance company on whether an updated survey is acceptable.

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  • real estate escrow

    an escrow is essentially a small and short-lived trust arrangement. it has become almost an indispensable mechanism for the consummation of real property transfers and other transactions such as exchanges, leases, sales of personal property, sales of
    securities, loans, and mobilehome sales.

    definition:
    california civil code section 1057 provides this description of an escrow:
    “a grant may be deposited by the grantor with a third person, to be delivered on the performance of a condition, and, on delivery by the depositary, it will take effect. while in the possession of the third person, and subject to condition, it is called an escrow.”

    essential elements
    the two essential requirements for a valid sale escrow are a binding contract between buyer and seller and the conditional delivery of transfer instruments to a third party. the binding contract can appear in any legal form, including a deposit receipt, agreement of
    sale, exchange agreement, option or mutual escrow instructions of the buyer and the seller.

    escrow holder
    an escrow holder is the depositary, agent, or impartial third person having and holding possession of money, written instruments, or personal property to be held until the happening of designated conditions. (once these conditions are met and performed the
    escrow agent is generally released from liability.) according to financial code section 17004, “escrow agent” is any person engaged in the business of receiving escrows for deposit or delivery.

    the escrow holder acts to ensure that all parties to the transaction comply with the terms and conditions of the agreement as set forth in the escrow instructions. the escrow holder may also coordinate the activities and professional services involved in the transaction, such as the activities of the lender and the title company as well as those between the buyer, seller and broker.

    instructions
    the conditional delivery or transfer is accompanied by instructions to the escrow holder to deliver the instruments and funds respectively on the performance of the stipulated conditions. there are two forms of escrow instructions employed: bilateral (i.e., binding on both buyer and seller) and unilateral (separate instructions of buyer and seller). since the escrow instructions implement and may also supplement the original contract, both are interpreted together if possible. if, however, the instructions contain terms in conflict with the original contract, the instructions, constituting the later contract, usually control. when instructions have been signed by the parties to the escrow, neither party may unilaterally change the escrow instructions. the parties may, by mutual agreement, change the instructions at any time and one party may waive the performance of certain conditions, provided the waiver is not detrimental to the other party to the transaction.

    while an escrow holder can be held liable for violating written instructions, the escrow holder is really only a stakeholder, not legally concerned with controversies between the parties. as such, an escrow holder is entitled to file an action of interpleader to require litigation of controversies.

    complete escrow
    properly drawn and executed escrow instructions become an enforceable contract. an escrow is termed “complete” when all the terms of the instructions have been met.

    escrow principles
    the following are major escrow principles:

    1. escrow instructions must contain mutuality and the understanding of the principals to the escrow. properly drawn instructions are clear and certain as to the intentions of the parties, the duties of the escrow holder, and the fact that it is the principals themselves who must perform the escrow contract by complying fully with the instructions. the escrow holder does not have, and must not exercise, discretionary authority.
    2. the escrow holder does not act as a mediator or advisor, or participate in customer controversy, or arbitrate disputes. instructions are drawn so that the parties to the escrow make the promises, perform, and put the escrow holder in a position to close the escrow.
    3. the escrow holder is prohibited from offering legal advice and must suggest that disagreeing parties consult an attorney (or real estate broker if it is a transaction matter that may be negotiated).
    4. escrow is a limited agency relationship governed by the content of the escrow instructions. as agent for both parties, the escrow holder acts only upon specific written instructions of the principals. when the escrow is closed, the escrow holder becomes agent for each principal with respect to those things in escrow to which the parties have respectively become completely entitled.
    5. when all parties to the escrow have signed mutual (identically conforming) instructions, the escrow becomes effective. if only one party has signed, that party may terminate the proposed escrow at any time prior to the other party’s signing.
    6. the escrow holder must avoid vague or ambiguous terms and provisions in instructions and documents.
    7. the escrow holder must forward immediately to the title company any document which is to be recorded and furnish a copy to any concerned party, so that the document’s sufficiency can be determined. this will help avoid delay in closing escrow.
    8. documents and funds not contemplated by the escrow instructions should not be accepted by the escrow holder without authorization of the principals.
    9. the escrow trust account must be maintained with extreme care. overdrawn accounts (debit balances) are strictly forbidden.
    10. escrows are confidential in nature. the escrow holder must not give out any information to third parties concerning an escrow without approval of the escrow principals.
    11. the escrow holder is the agent of the principals to the escrow. legally, any facts known by the escrow agent are imputed to the principals. any detrimental or new material information, previously undisclosed, made known to the escrow holder and affecting the principals should be disclosed to them for their instructions in the matter.
    12. the escrow holder must maintain a high degree of trust, efficient customer service, and good customer relations.
    13. the escrow holder must remain strictly neutral, not favoring either party. the escrow holder must not advise either party, as any gain to the one will likely be detriment to the other.
    14. the escrow holder must maintain records and files on a daily basis, to be sure that a procedure is not overlooked. neat and orderly files, complete with check sheets, will help insure smooth progression toward closing.
    15. before closing an escrow, the escrow holder must audit the file, accounting for all items to be handled, recorded and delivered, including cleared funds.
    16. the escrow holder must not disburse any funds from an escrow account until all items such as checks, drafts, etc. have cleared, and thus have become available for withdrawal. this “holding period” may range from 1 to 10 days, depending on the type and location of lender.
    17. closing and settlement must be prompt, using forms which are simple and clear.

     

    general escrow procedures (may vary according to local custom)
    basic escrow procedures include the following:

    1. 1. prepare escrow instructions on the escrow holder’s printed form. all principals to the escrow sign instructions which fully set forth the understanding of the parties to the transaction. usually accompanied by an initial deposit. for a home purchase, the mutual instructions of the principals set forth:
    • the purchase price and terms;
    • agreement as to mortgages;
    • how buyer’s title is to vest;
    • matters of record subject to which buyer is to acquire title;
    • inspection reports to be delivered into escrow;
    • proration adjustments;
    • date of buyer’s possession of the property;
    • documents to be signed by the parties, delivered into escrow, and recorded;
    • disbursements to be made, costs and charges and who pays for them; and
    • date of closing.

     

    2. order title search on the subject property, resulting in a “preliminary report” from the title company. the escrow holder examines this report carefully for items not contemplated in the escrow instructions. the seller must clear any such item or it
    must be brought to the attention of the buyer “for information” and “expression of desire in the matter.”

     

    3. request demands and/or beneficiary statements from any lenders of record. the necessary document will be:

    • a “demand for pay-off” if an existing loan is to be paid in full through escrow

    or

    • a “beneficiary statement” if buyer is purchasing “subject to” or assuming a loan.

    4. accept structural pest control report and other reports (such as plumbing or roofing inspections) into escrow and obtain, as instructed, any necessary approvals from the parties in connection with the reports/inspections. hold the reports (and any funds associated therewith) for delivery to the proper party, or recording, at close of escrow.

     

    5. accept new loan instructions and documents if the buyer is obtaining new financing. obtain buyer’s approval/execution of the documents. satisfy all lender’s instructions prior to using the lender’s funds to complete the transaction.

     

    6. accept fire insurance policies and complete settlement by:

    • accepting and delivering any fire insurance policy and transferring the insurance if so instructed by the parties;
    • making all prorations (e.g., property taxes and insurance) as instructed by the parties;
    • completing the accounting (settlement) details and informing the principals that escrow is ready to proceed.

     

    7. request closing funds. the law prohibits disbursal of funds from an escrow account until all items such as checks, drafts, etc. have cleared and become available for withdrawal.

    8. audit file in preparation for closing by:

    • accounting for all funds (cash reconciliation statement) and documents;
    • determining that the parties have complied with all escrow instructions.

     

    9. order recording by authorizing the title company to run the seller’s title to date and record the necessary documents, provided no change has occurred in the seller’s title since issuance of the preliminary title report.

    10. close escrow, after confirming recording, by:

    • preparing settlement statements for buyer and seller;
    • disbursing all funds; and
    • delivering documents to the party or parties entitled thereto.

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