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Submitted by: Matthew Larsen
Purchasing your first home is a very big step in the overall realm of life. You find yourself about to commit to, in most cases, the largest amount of money and debt of your life. It can be overwhelming, confusing and for most of us, completely frightening. The definition of first time home buyer varies a little bit so lets take a look at it. The definition from the eyes of the buyer may be purchasing your first property, but the definition through the eyes of the bank means not writing off any mortgage interest for the past three years. Thats right. You can qualify as a first time buyer even if you have owned properties in the past.
In todays real estate market, many entry level properties are subject to some sort of distress. This is an automatic red flag and buyers need to be aware of what they are purchasing and signing. Make sure to ask a lot of questions about anything that is not understood and seek professionals who have experience with these types of sales to work with. A first time buyer should also be aware that distressed sales, meaning short sales and REOS, take longer to close. Lets clarify these terms for those who dont know.
A short sale can be a little bit confusing. It is really a short pay transaction meaning that one will try to negotiate an offer for sale with the bank for less than whats owed on the note. This process can have a wide spectrum of scenarios often leading to a complicated transaction. It would depend on if there is more than one lender involved and if they can agree on the terms of sale. The lender will also be a third party added to the transaction with the seller still holding title but the sale subject to lender approval. When the market was hot, there were many creative mortgage finance vehicles in place involving junior loans. The problem is that a junior loan is subordinate to the note in first position and can complicate the agreement between the two asset managers. The senior loan does not care if the junior loan gets wiped out and the junior loan doesnt want to take a total loss. There are also tax implications and, in some cases, recourse involved, so its highly recommended that the seller consult with both a CPA and an attorney to know what theyre getting into. It is not uncommon for a short sale transaction to take several months to close, and first time buyers should be aware of this.
An REO stands for real estate owned. This process varies a little bit from state to state depending on if judicial action is required. The process starts with the borrower not making payments until a notice of default is issued. This will give the borrower a certain amount of time to bring the note current with penalties and interest. If the borrower does not comply, a second notice is issued called a notice of sale or in some states a notice of trustees sale. States that dont require a judicial decision to foreclose on a property have a trustee as a neutral party who has the right to foreclose upon default procedures being followed without going through the court system. When a lender in first position makes a loan on a property, they hold the property as collateral in case of default. When the bank buys back a property, they take over ownership and have the right to re-sell that property on the open market. This is when a property becomes an REO. Now lets talk about five important things for first time buyers.
1. Be prepared. Do your homework to fully understand what your needs are. Pick your top three areas to live, understand what market value is in the area and what you can afford. Try to have three active trade lines that are below 30% of what the limits are. If 30% is not attainable, try to have trade lines under 50%. Pull your credit and look for any mistakes and dont make any purchases until after you close escrow. Lenders will pull your credit again prior to funding to make sure nothing has changed. First time buyers also need to understand there are closing costs involved when purchasing a property. A good rule of thumb is to estimate between 2-3% of the purchase price to close but ask your loan officer to give you solid numbers.
2. Understand your loan. Fully understand what loan works best for you when selecting a loan product. Make sure to define your strategy and understand how long you will likely stay in the property. If you are going to stay in your property for five years, it would make sense to get a loan with a better interest rate for a shorter duration than a thirty year fixed with higher interest. If you are planning to stay in the property for a long time, a thirty year loan may make more sense. Be aware that different loans have different pros and cons. Ask questions and know what they are. FHA loans have their own appraisers that can ask to have repairs done and also charge mortgage insurance as part of the payment.
3. Have inspections done. Make sure that you know the condition of the property and what youre getting into. Yes it will cost some money out of pocket, (usually about $500-$600) but There is nothing worse than to have the dream of home ownership turned into a nightmare because of a major repair item needing to be done. This is especially important when buying a distressed property as the banks never want to fix anything and usually engage only in as is sales.
4. Trust your advisors. Make sure during your selection process that you choose wisely about who to work with. It is very important to ask a lot of questions and be selective with who is chosen to facilitate both the sale and the loan. A good professional will be able to alleviate many of the unforeseen variables that may arise throughout the duration of the transaction from experience. It is always a good idea to ask for referrals from people you know and interview more than one candidate to represent you.
5. Be patient. Purchasing a property is a big step and is a process. There are many steps involved and no two transactions are the same. This is also another reason to make sure you trust who you are working with, and they will look out for your best interest while driving the boat in the right direction.
Understanding and implementing these things into your experience will greatly help to insure you get what you want and can afford. Please visit my websites for more tips and information on purchasing or selling properties. I also provide free property search for most of the state of California. It is always a good idea to consult with an attorney and a CPA if legal or tax issues need to be further understood.
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About the Author: Matt Larsen is a licensed real estate professional in the San Francisco bay area. Please visit my sites for more information and free property search.
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