Congratulations, you are among the millions of Americans who choose to nurse their New Years Eve hangover by searching for homes online. In fact, New Years Day ranks among the top three most active days for people to search for a home online, along with July 6 and the weekend after Thanksgiving.
Question: Does it matter which lender/mortgage company I choose when I purchase a home?
Answer: Choosing a good lender is one of the most important decisions you make during the home buying process. One of the initial differentiators is whether your lender runs credit and collects your documents up-front (W-2s, income verification, bank statements, etc) or just asks questions about your income and debt. This early effort drives most of the following reasons a good lender is able to make such a big difference:
Better Pre-Approval: When I review offers on a listing, I put a lot of value in the quality of the lender who wrote the pre-approval letter for the buyer. I also call the lender to 1) make sure they’re responsive 2) ask them what information/documents they reviewed and 3) about the financial strength of the buyer. Approval letters from unreliable lenders or lenders who haven’t reviewed a full set of documents pose a moderate risk of not closing, which weakens the offer.
Close Faster: Online lenders and larger banks have difficulty closing in less than 35-45 days, but a good lender can close in less than three weeks. If you find yourself competing for a property, working with a lender who can close faster than the offers you’re competing against will significantly increase the probability of your offer being chosen. I’ve represented buyers and sellers where the chosen offer isn’t the highest sale price, but the strongest overall offer, often attributed to the quality of the lender and their ability to close faster.
Don’t Miss Settlement
Good lenders do not miss the settlement date. Their reputation and business rely on it. If you miss the contracted settlement date, you’re (usually) in default and expose yourself to risks including loss of Earnest Money Deposit or having the contract voided by the seller.
A good question to ask your lender is where their staff works. There are quite a few people involved in getting your loan approved including the loan officer, processor, and underwriters. Lenders with a history of missing settlement deadlines often have staff working in different locations, that don’t regularly work together. If your lender works in the same physical office as all of those people, that’s a good indication that they can handle issues efficiently and have a high probability of meeting the settlement date.
Don’t Get Duped (Rate vs APR)
Be careful when you’re comparing interest rates, especially online rates. First, make sure you’re comparing the Annual Percentage Rate (APR), not the interest rate. Many lenders advertise lower rates by including points (you pay cash up-front for a lower rate) or they charge higher fees. The APR is a measure of the total cost of the loan, including points, fees, and interest rate and allows for an apples-to-apples comparison. Second, it’s important to note that conforming loans (loan amounts of $636,150 or less), which are backed by Fannie Mae and Freddie Mac, typically have very little variation in rates because they usually follow similar Fannie and Freddie guidelines and market pricing. The biggest differences in rates are on non-conforming loan amounts (over $636,150) and in special programs like Doctor or Attorney loans.
A reliable pre-approval gives you the confidence that you’ll qualify for the loan you’re applying for. Weak pre-approval letters lead to surprises during the loan application process, which can lead to rejection letters or delays. The last thing you want is to find out you don’t qualify after you’ve spent money on a home inspection, appraisal, and started packing for a move that may not happen. Reviewing all of your documents early also gives you and your lender time to fix credit scores, debt ratios, and other issues to increase your purchasing power or improve your interest rates.
In most cases, buyers should be considering multiple loan products and finding the best fit. This is particularly true if you’re buying and selling a property and would like to purchase without a home sale contingency, if you’re exploring low down payment options, or if you’re planning to own the property for less than 10 years and can benefit from the lower rates of an Adjustable Rate Mortgage (ARM). A good lender will have access to a wide range of great products, including Doctor and Attorney programs, and be able to advise you on the type of loan that nets you the best long-term results.
If you’re considering buying or in the process of talking to lenders, I’d be happy to make some recommendations based on your financial situation, type of purchase, and goals. Feel free to reach out to me at Eli@RealtyDCMetro.com.
Question: What responsibility does a seller have to disclosure problems with their home or the surrounding community?
Answer: Sellers cannot lie about or conceal material defects of their home, but in Virginia, property owners are under no responsibility to disclose them to a buyer. That’s because Virginia is one of the few states in the US still operating under the common law concept of Caveat Emptor, meaning “Let The Buyer Beware.” This places the duty of discovery (of defects) on the homebuyer.
Residential Property Disclosure
The Residential Property Disclosure is required in most transactions with the exception of sales between relatives, foreclosures, builders and a handful of other scenarios. The Disclosure, signed by the seller and buyer, states that the homeowner(s) makes no representations or warranties with respect to things like:
- Property Condition
- Sexual Offenders
- Adjacent Parcels
- Wastewater Systems
- Historic Districts
Alternatively, jurisdictions like Washington DC require extensive disclosures by homeowners. The DC Disclosure runs 4+ pages long and requires owners to make representations on every material aspect of the property and community including roof, insulation, heating/cooling, appliances, drainage, zoning and more.
REALTORS Held To A Higher Standard
While Virginia homeowners aren’t required to disclose defects, the REALTOR Code of Ethics holds us to a higher standard. A listing agent who is a REALTOR “shall disclose to prospective buyers/tenants (customers) all material adverse facts pertaining to the physical condition of the property which are actually known by the licensee.” While listing agents don’t have a duty to discover latent defects, they are required to communicate anything they’re made aware of through the standard course of the transaction be it discussions with the seller, inspection of the property or otherwise.
Sellers are well protected by Virginia law and buyers are made to do their homework on every purchase. In most cases, buyers don’t have the luxury of a lengthy discovery period prior to buying a home, so what are some ways buyers can reduce their risk?
- Hire a great home inspector. A good home inspector is one of the most important relationships your real estate agent should have. While inspectors cannot pry up floorboards and open walls to inspect every bone of a house, a great inspector knows the signs of expensive defects in plumbing, foundation, water intrusion, etc.
- Talk to your future neighbors. Visit the neighborhood without your agent and knock on some doors if you can’t find any neighbors outside. Start the conversation off with general questions about what it’s like living in the community and gradually move into questions about the home, if there are any noise/traffic issues, etc.
- Ask direct questions of the seller if there are any red flags. Remember, sellers cannot lie, so if you find a wet spot in the basement, ask if they’ve ever dealt with plumbing issues or water intrusion in the basement.
- Work with a local expert. We are responsible for disclosing material facts about the purchase beyond the physical home itself, meaning any relevant information about the community that impacts your decision to purchase. It takes a local expert, somebody who follows the community closely, to know if there are any material concerns.
Personally, I’d like to see Virginia make changes to the seller disclosure laws to balance the scales a bit. One could make a case that increasing disclosure requirements would reduce buyer risk, thereby making Virginia homes more valuable and pushing home values up across the board (sellers would still have the ability to offer “As-Is”). As a counter point, buyers in jurisdictions with heavy disclosure requirements can rely too much on what the seller says/does not say and fall victim to a seller simply not being aware of a defect that a buyer could have discovered through due diligence. What do you think? Are you happy with the current system or would you like to see Virginia get rid of Caveat Emptor and place more duty on the seller to disclose material defects?
Question: Why do I see different counts for the number of days a property has been listed for sale depending on the website I visit? What are the rules around agents resetting days on market?
Answer: Days on market is one of the most important data points when determining an appropriate offer:
- The longer a property has been on the market, the more likely a seller is to accept a reduced sale price
- Higher days on market = more leverage for buyers
- Sellers are most likely to fight for full asking price during the first couple of weeks
- You’re most likely to encounter multiple offers in the first week
The chart below shows the average sale price to original list price ratio based on the number of days a property has been on the market (100.00 = sold for full ask). On average, a property that sells in the first 10 days goes for above the asking price and after 30 days, the average seller takes a 4% reduction from the original asking price.
Days On Market – Property (DOMP)
DOMP is the number you want to focus on because it’s the number of days a property(based on the address) has been actively marketed for sale and it’s difficult to reset this number (see Resetting DOMP section).
Days On Market – MLS (DOMM)
DOMM is the number of days a listing has been actively marketed for sale. A listing is the individual record created by an agent to market a property for sale. It’s easy (and legal) for agents to reset this number as many times as they’d like by re-listing a property for sale. MRIS (see last week’s article for definition) makes it pretty easy for agents to do this and it’s common to see this action taken after a large price reduction because it gives the new listing more visibility to the public by, for example, popping back up in buyer’s automated searches as a new listing.
The only way to reset DOMP is to withdraw a property from the market for 90+ days. This is an MRIS rule and may be different in other markets outside of the MRIS coverage area (VA, DC, MD, and parts of WV, PA, and DE). It’s somewhat common for a seller who’s not in a rush to remove an unsold listing from the market before the winter and allow the DOMP count to reset prior to re-listing in the spring.
How Do You Know?
Be careful, most public-facing websites use DOMM because they track the number of days the listing, not the property, has been on the market. Most good real estate search websites offer a “property history” section where you can view previous sales, when it’s been listed, taken off market or had a price reduction. MRIS has data fields specifically for DOMM and DOMP so your agent can easily provide this information and if you receive listing information from your agent directly from MRIS, those data fields are easily viewable.
Understanding the impact days on market has on final sale price is critical for buyers and sellers to maximize their value. The impact varies by locality and by the type of housing, so it’s important to also understand your market.
Question: Can you explain what an MLS and MRIS are and how they relate to home sales?
Answer: I got this question from a few people after last week’s article about the type of data available to agent’s, that’s not available on consumer-facing sites. Over the years, I’ve found that a lot of people are familiar with the terms MLS and MRIS, but not quite sure how it ties into the real estate sales process. The following explanation is 100% my own, in an attempt to simplify it for ease of understanding.
What is a MLS (Multiple Listing Service)?
An MLS is a real estate information exchange platform and database created by cooperating residential real estate brokerages to improve the efficiency of their real estate market. As a privately created and managed organization, each MLS is primarily funded through the dues of the brokerages and agents within the market it serves. There are hundreds of MLS’s across the country and each operates under its own direction and rules & regulations. The information you find on consumer-facing websites like Zillow, Realtor.com and Homesnap comes from various MLS’s and each MLS has the right to negotiate its own relationship (syndication agreements) with these sites and determine what information is made available. I recall reading something last year about an MLS in Pennsylvania that was considering blocking 100% of their data from Zillow.
What is the MRIS (Metropolitan Regional Information Systems)?
MRIS is the MLS that serves our region including Virginia, Washington DC, Maryland and parts of Pennsylvania, West Virginia and Delaware. It is one of the largest MLS’s in the country by size and geographic area and supports nearly $125B in annual real estate sales. Having an MLS that services such a large area provides substantial value to the consumer because it allows sellers, who work with an agent, access to a wide audience and ensures that buyers searching online will see the same homes for sale, regardless of which website they’re on.
The Executive Committee and Board of Directors is made up of representatives from the region’s major brokerages and directs the business of MRIS, which has developed into a full-blown software, services and technology company consisting of familiar roles such as Director of Marketing, Director of Customer Support and Chief Operating Officer. MRIS leadership has adopted a strict set of rules & regulations to provide data uniformity and ensure fair play.
The primary interaction agents have with MRIS is through the online portal to enter their listings (homes for sale) and search for homes for sale on behalf of buyer clients. Agents can send listing information directly to clients via MRIS, but some brokerages and 3rdparty vendors have built slick programs that interface with MRIS and allow for a better agent-to-client interface using MRIS data. MRIS is a one-stop-shop for agents in our area to find nearly 100% of homes for sale, coming soon to the market and past sales.
Without MRIS, our real estate market would be fragmented and inefficient for consumers, agents and industry partners, so overall it provides a huge benefit to the regional real estate market. However, like most industry-focused companies built before the latest technology revolution, it lags in customer experience and user interface design, which are areas MRIS is working on to provide both agents and consumers a better end-to-end experience.
Question: Are there any special loan programs in Arlington or Virginia that I should look into?
Answer: The Virginia Housing Development Authority (VHDA) offers a great loan program that includes closing cost and down payment assistance. There aren’t any Arlington-specific loan programs available, but some special programs are made available based on your income and sale price based on the local (Arlington) averages, which are both high. There is a specific Arlington Housing Grant Program available for those who qualify and I’m happy to send additional information on this program if you are interested, but there are too many caveats/requirements to provide specifics here.
As usual, when I get financing questions, I like to turn to one of Northern Virginia’s top lenders, Troy Toureau of McLean Mortgage, to provide a detailed response.
Take it away Troy…
Despite the many changes in home financing which have occurred during the past decade, one important fact has never changed: The government has several programs to help buyers purchase a home. Here is a quick summary of the major “government sponsored” home financing alternatives.
The Virginia Housing Development Authority
Authorized by the Federal Bond Subsidy Act, this state agency issues bonds, which enables it to offer below market interest rates and government down payment assistance on mortgages. VHDA offers several programs and most recently has issued a Grant program, which can help with closing costs and a down payment. The VHDA can also issue Mortgage Credit Certificates, which will help defray the cost of the payment by providing a tax credit for a certain amount of interest paid.
VHDA requires that the homebuyer has not owned a home in the past three years and also has maximum income and asset limits. For those purchasing in certain targeted areas, there is flexibility with regard to these restrictions. The income limits in the Washington, DC area are $121,900 (2-person families) or $142,300 (3+ person families) and the sales price limit is $500,000. There are some targeted areas in Arlington County and if you are interested in knowing whether a property is in a targeted area, email@example.com.
In addition to the VHDA Grant program, VHDA provides a variety of options to help first time buyers finance a home. These include VHDA loans guaranteed by Virginia and insured by the Rural Housing Service requiring no-money down. The VHDA FHA-Plus Program provides a second mortgage for those who need closing cost and down payment assistance and the conventional VHDA alternative requires a down payment of only 3.0% with private mortgage insurance. Keep in mind that the three-year history, income, and asset limits noted above still apply.
The Veterans Administration (VA)
VA loans require no down payment and no monthly mortgage insurance. Closing costs can be paid by the seller or through a lender rebate. The homebuyer must be a veteran or active military. National Guardsman and Reservists are also eligible for the program. There is no requirement for the veteran to be a first time homebuyer and no maximum income or asset requirements.
The Federal Housing Administration (FHA)
FHA loans require a 3.5% down payment, which can be met with grants through VHDA or other housing agencies, if available. FHA also allows the down payment to come from a gift from a relative and closing costs can be paid by the seller or through a lender rebate. There is no requirement for the applicant to be a first time homebuyer and no maximum income or asset requirements.
Fannie Mae and Freddie Mac
The conforming agencies both have programs designed to facilitate homeownership for low-to-moderate homebuyers. The requirements vary depending upon the agency, but generally a 3.0% down payment is required and there are maximum income requirements that vary by location. Credit score requirements tend to be slightly more restrictive under these programs, as compared to FHA and VA Loans.
Government aid for home ownership does not end with these programs. Homeowners of primary residences can deduct interest and real estate taxes from the taxes. This lowers their taxable income and thus their effective housing payment. We suggest you consult with an accountant or financial advisor to discuss all of the tax benefits of home ownership.
If you would like to know if you qualify for one or more of the government sponsored homeownership alternatives, contact Troy Toureau of McLean Mortgage Corporation at301-440-4261 or firstname.lastname@example.org. NMLS ID #5618. McLean Mortgage Corporation| NMLS ID #99665|(www.nmlsconsumeraccess.org)
Question: I’m hoping to buy my first home soon and saving enough cash is the biggest hurdle. Are there any strategies to limit the amount of money I need to save?
Required Cash to Buy
In order to purchase a home, you’ll need to have cash funds available for your down payment and closing costs. The down payment is based on the type of loan you choose, with the most common down payment amounts being 0% (Veteran Affairs loan), 3% (FHA), 5%, 10%, 20%, or 25% of sales price. Closing costs commonly reach 2-3% of the sales price and include things like taxes, title insurance, and lender fees.
Reducing Closing Costs
If you believe there’s room to negotiate on the home you’re making an offer on, you can negotiate that discount in the form of a seller subsidy (aka seller credit) instead of on the sale price. The subsidy will be credited directly against your closing costs, but any amount over your closing costs will go unused (cannot be credited against the down payment).
For example, if the home is listed for $500,000 and you believe you can negotiate a 2% discount (average discount from list price in Arlington over the last 12 months), you can target a $500,000 sale price with a $10,000 seller subsidy instead of a $490,000 sale prices and no subsidy. The seller receives $490,0000 from the sale either way. You reduce the amount of cash funds required to purchase by $10,000 (projected closing costs of $10,000-$15,000), but increase your total loan amount by $10,000. For many cash-strapped buyers, the benefit of reducing the immediate cash requirement outweighs the long-term cost of increasing the loan amount.
Let’s say it’s the first week a home is on the market and the seller refuses to negotiate on the price…there’s still an option. Using the example above of a $500,000 home, you can increase the sale price offer to $510,000, but include a seller subsidy of $10,000 so that the seller still nets the full asking price. Use this strategy with caution. Sellers may be hesitant to agree to the increase in sale price if there’s a concern that it won’t appraise for that amount. The implications of an appraisal being less than the contracted sale price put the seller at risk, but I’ll need another column to fully address that topic.
By including a seller subsidy, the sale price remains higher than it likely would be without it and there are some minor changes to overall costs based on items calculated as a percentage of sale price including recording fees, capital gains, and commission. The net effect on these is small relative to the transaction, but worth noting for both buyer and seller.
Before deciding how much of a seller subsidy you’ll ask for, be sure to get an estimate sheet from your lender, which will include estimated closing costs. Make to tell them what you’re using it for and confirm they haven’t left any closing costs or pre-paid items off. Remember, if the amount you get from the seller exceeds your closing costs, in most cases, it’ll go unused so I always recommend that my clients target a subsidy equal to just 90-95% of the estimated closing costs from the lender because the numbers can fluctuate in either direction.
As a buyer, would you prefer to reduce the amount of cash you need or keep your loan amount as low as possible?
Question: Can you explain the difference between settlement and ratification?
Is there another metro area with more “industry languages” than D.C.? Between consultants, lawyers, and politicians, you can sit next to somebody at a quiet bar, who’s speaking perfectly clear English, and not understand a word. Realtors are just as guilty of rattling off terms and acronyms in the course of conversation, so here’s a quick glossary of common terms that I’m frequently asked to define.
- Ratification: Occurs when both parties (buyer and seller) have agreed to the deal and the contract has been signed/initialed by both parties without any additional changes.
- Settlement: This is the date that the home is actually purchased by the buyer. Also known as “closing.”
- Underwriting: The final approval process for a loan. The underwriter reviews the entire loan application package and issues an approval or notifies the buyer of any conditions that must be met in order to secure a loan.
- EMD: Earnest Money Deposit. A negotiable sum of money deposited by the buyer into an escrow account after the contract is finalized, usually within 3-5 days and 2-3% of the sales price. If the buyer walks away from the deal outside of legal means/contingencies, the seller can keep the entire sum of money as damages.
- Contingency: A term within a sales contract that gives the buyer or seller the right to void a contract, without penalty, if certain criteria are/are not met. A common contingency is a Home Inspection. The buyer is given the right to an inspection and if the buyer and seller cannot agree on corrective action requested by the buyer, the buyer has the right to void the contract, within a pre-determined period of time (usually 5-10 days after ratification).
- FSBO: For Sale By Owner. When a homeowner decides to do something crazy and sell his/her home without an agent J
- ARM: Adjustable Rate Mortgage. A loan with a fixed interest rate for a specific period of time (usually 5, 7, or 10 years) that can adjust to a different rate, based on market rates when the fixed period ends. It’s well established that these loans led to the housing crash 10 years ago, which led to the Great Recession, and ARMs got a very bad name in the process. However, they can be a great product for many buyers because they offer lower rates than a 30-year fixed (most common loan product) and most homeowners will sell their home before the time the rate can adjust.
- PITI: Principal, Interest, Taxes, and Insurance. The total monthly fixed payments for a homeowner. PITI is commonly used to determine the daily rent-back rate for a Post-Settlement Occupancy Agreement (seller remains in the home for a specified period of time after settlement).
- 1031: A 1031 Exchange allows a homeowner to defer capital gains tax charges from a home sale by using the proceeds of the sale towards the purchase of another home. You must meet certain requirements like identifying the home to purchase within 45 days and settling within 180 days, from the date of the previous home sale. As with all tax-related transactions, it’s advisable to consultant an accountant beforehand.
Let me know if there are any other terms you’ve heard thrown around by agents that you aren’t clear on. I’m happy to write a second column with more terms.
If you’d like a question answered in my weekly column, please send an email toEli@RealtyDCMetro.com. To read any of my older posts, visit the blog section of my website at http://www.RealtyDCMetro.com.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with Real Living At Home, 2420 Wilson Blvd #101 Arlington, VA 22201, (202) 518-8781.
Question: Where do the most problems occur during the home sale process?
I get this question from almost every first time home buyer and seller I work with. They want to know where problems turn up and how to avoid them. The two areas I see causing the biggest issues or delays are the home inspection and financing. Here’s some advice to buyers and sellers on each.
The purpose of a home inspection is to make sure there aren’t any major problems with the “bones” of the house (foundation, pipes, roof, etc) and ensure the major systems and appliances are operational. In most cases, homes are purchased contingent on a home inspection, meaning the buyer is permitted to make requests of the seller after the inspection and if the buyer and seller cannot come to an agreement, the buyer has the right to walk away from the deal without losing the Earnest Money Deposit.
Buyers: Remember that you are buying a used home (usually). Things will be near or beyond their expected useful life. If the water heater is from 1996, but it’s working well, you can’t expect the seller to buy you a new one. New construction is more expensive for a reason.
Sellers: If something doesn’t work or is broken, you should fix it or offer the buyer a comparable credit. Most homeowners know what problems exist and it’s a good idea to pro-actively solicit bids so you can move quickly if needed. It’s likely that issues in one inspection will show up in another inspection report, so it’s in your best interest to work hard to compromise with a current buyer instead of letting a deal go and risk facing the same problem(s) with a second buyer.
A lot has to go right in order for buyers to secure a loan in time to settle. Since 2011, banks have significantly increased the paperwork requirements and scrutiny on borrowers and recent changes by the Consumer Finance Protection Bureau (CFPB) have changed the protocols between lenders and settlement agents, causing difficulties for both parties. Without financing, there’s no deal and if there’s no deal, a buyer’s Earnest Money Deposit may be at risk.
Buyers: Ask your agent for a local lender and a loan officer who is responsive, with a good reputation. Your pre-approval should be based on a detailed review of your financial accounts and include a credit check. Please avoid services that offer “immediate” approvals and don’t require documentation like tax returns or account balances. Finally, do your homework while you’re searching for properties so that you’re ready to select your lender within a day or two of going under contract. When you find a property you love, ask your lender to prepare a few estimate sheets so you’re comfortable with the numbers and the type of loan that works best.
Sellers: Have your agent call the loan officer listed on the pre-approval (submitted by buyer with offer) and ask questions about what they reviewed. This will also give you a sense of how responsive they are. An unresponsive lender makes life tough on the buyer and is a bad sign for you. Ask your agent to check-in with the loan officer occasionally during the financing period to make sure the buyer is cooperating and acting in an appropriate time frame.