FAQ for Buyers

1. Why should I use a buyer’s agent?

Every buyer should have a buyer’s agent giving them professional advice.

A buyer’s agent will advise you on pricing, negotiation strategy and will assist you with the myriad of details involved in a home purchase. Since there is no fee paid by the buyer to have an agent that represents their interests, there is no reason to not use one.

If you find a house on your own, the listing agent will offer to assist you in making an offer. Keep in mind that if you shop at a furniture store, the salesman will help you, but is still working to get the best price for the store. The same goes with listing agents that are representing the seller.

2. Won’t I get a better price if I call the listing agent directly?

Many buyers think that they will get a better price on a home if they call the listing agent directly since the listing agent won’t have to pay a portion of the commission to another agent. Rarely is this true. Usually, listings agents simply keep the entire commission for finding a buyer on their own.

Let me explain how real estate agents are typically paid. A seller agrees to pay a commission (usually 5-7% of the sale price) to the agent/brokerage that has listed their home when (and if) the sale closes. Upon closing, the listing brokerage agrees to pay a portion of the commission to the agent that represented the buyer (usually almost 1/2).

Regardless of whether there is a buyer’s agent or not, the seller still has to pay the same commission. Some agents will discount the commission partially if they don’t have to pay a buyer’s agent and that discount MIGHT be passed on to the buyer. However, it’s really impossible to know that the buyer got a lower price since the buyer has no way of knowing what price the seller would have agreed to if they had an agent vs if they didn’t.

Even if a buyer can get the house for slightly less without an agent, they are likely to come out ahead by using a buyer’s agent to assist them by understanding what to ask for in the inspection process and repair negotiations.

For example, I’ve had buyers that would have had costly sewer lateral repairs ($5000-$8000) had I not recommended that we do a sewer lateral inspection and require the seller to make the repairs before closing. Most buyers would not have gotten a sewer lateral inspection without a buyer’s agent suggesting it.

3. Can my buyer’s agent help me if I find a FSBO home that I want to see?

Most buyer’s agents will happily assist you with the purchase of a FSBO home listing. However, since agents are paid out of the commission paid by the seller, you should let your agent call the FSBO seller instead of calling them yourself. Most FSBO sellers will agree to pay a commission to a buyer’s agent in order to get access to you…a potential buyer.

If you call the FSBO seller yourself, they may refuse to pay the buyer’s agent commission. If you want the house, it forces you to either pay your agent yourself, increase the price of the house so that the seller can pay the agent, or buy the house without anyone advising you of your rights.

Since the FSBO seller also doesn’t have any professional assistance, there are a lot of things that can get overlooked such as municipal requirements and required disclosures. Without either a buyer or listing agent involved in the deal, details such as arranging appraisals, inspections and closing all fall on the shoulders of the buyer.

4. What do I need to know before I write a contract?

Before you make an offer on a house, you need to talk to a lender and get a pre-approval. Lending standards having tightened up in the last year. Most sellers will require you to include a pre-approval that shows that your credit and income has been verified or they won’t accept your offer.

You’ll also need to write a check for earnest money. In the St. Louis area, earnest money is typically around 1% of the listing price. Sometimes more, sometimes less.

Earnest money is sometimes call ‘good faith’ money. It shows the seller that if they accept an offer, that the buyer has something to lose by breaching the contact. If the buyer has a contingency (such as a home sale, inspection or appraisal contingency) which allows the contract to be terminated, then the buyer gets the earnest money back as long as the contingency terms are met.

However, if a buyer breaches the contract (meaning you BREAK the contract when you aren’t allowed to based on the contract language), then the earnest money is forfeited.

It is also important to understand that deadlines are extremely important. Most contracts will provide a time period for buyers to check out the house (inspections, appraisal, title, survey, insurance, financing). Buyers can get out of the contract or can ask for the seller to fix a problem in order for the deal to close. However, if a buyer misses a deadline by even one day, they lose all of their rights regarding that contingency.

5. If I have a house to sell, do I sell first or find a new house first?

The answer to this one depends on your circumstances. Every homeowner needs to decide which they feel will be harder (selling their house or finding a new house) and evaluate their risk tolerance for owning two homes.

If you think it might take a while to sell your current home and it won’t be too hard to find something new that you like, then you should get a contract on your home before making an offer on a new one.

However, if there are very few homes you would consider buying and you are willing to stay put until you find the right home, then you should wait to put your house on the market until you have found a new home. When you find a winner, you can then try to get a house sale contingency contract accepted, or you can list your house and cross your fingers that your dream home doesn’t sell before you can get your current house sold.

Another alternative is to go ahead and sell your home even if there isn’t a house available that you want to buy. You could then arrange for a short term lease as you look for a new home.

During a strong buyer’s market, sellers often go ahead and buy a new house without having sold their current home. You should only do this if you are very confident that you can sell your old home fairly quickly, are prepared to pay two mortgages if you are wrong and it takes longer to sell than you think it will, or will consider renting out the old house if you just can’t get it sold.

6. How do I know what I can afford?

Before you call a lender, you need to decide how much you can afford to spend each month on your housing.

The first step is to make a budget. Start with identifying your net income (after taxes are paid), and then look at your expenses.

Identify the cost for all of your fixed expenses including your current mortgage or rent. Fixed expenses are items that don’t change each month and you must pay such as haircuts, health and car insurance. Next, identify expenses that are not optional, but fluctuate each month. These expenses might include utility bills, gasoline, and grocery purchases. Estimate on the high side since expenses will go up when you become a homeowner or purchase a more expensive/larger property. Don’t forget to include items that come up just a few times a year such as professional memberships. Finally, decide how much money you’ll need each month for savings (retirement, family needs, household improvements and travel), entertainment, household repairs and miscellaneous stuff.

Subtract all of your expenses from your income and see how much is left over. If there isn’t anything left over, then you either need to keep your housing costs the same or you need to cut costs somewhere else.

Once you have a good idea of what you can afford each month, you should call a lender. The lender will ask how much money you have for a down payment and closing costs. After checking your credit and identifying how much you can spend on your monthly payment (PITI = principal, interest, taxes & insurance), the lender should be able to tell you the how much you can borrow.

Do NOT just ask the lender how much they will lend to you. It isn’t about what a bank will give you, but about what you feel that you can afford. Most people would find themselves house poor if they borrowed the maximum that the lender offered them. Since most of us still want to travel, eat out and save for our futures, you should always be conservative when deciding the maximum price for your home purchase.

7. What are the differences between the loan options?

There are a few loan types that are used by most borrowers.

The standard loan length is 30 years. Borrowers that can afford higher payments in order to pay off the loan faster will often take out a 15 year loan. Don’t worry if you don’t plan to stay in the house for 15-30 years. When you sell, the loan will be paid off at closing (NOTE: make sure your loan does not have a pre-payment penalty or you will be charged when you sell or refinance).

The majority of loans are either fixed rate or adjustable rate (ARM) mortgages. Fixed rate loans have a FIXED interest rate for the entire length of the mortgage. ARM mortgages have an interest rate that is fixed for a certain length of time, and then adjusts with the market conditions. For example, a 5 year ARM means that the initial interest rate won’t change for 5 years. Then, the interest rate can go up or down based on the current interest rates. The loan terms will determine how often the rate can change and the maximum rate that can be charged. Unless you know that you will definitely be moving before the ARM resets, you should make sure that you can afford the payments if the interest rate resets to the maximum rate. If you can’t, then don’t take out an ARM mortgage. Don’t simply assume that you can refinance. If property values decline, your financial or job status changes, or lending practices change, it may not be possible for you to refinance.

There are also different categories of loans. The best interest rates available are usually for conventional loans. These loans meet banking industry guidelines (Fannie Mae & Freddie Mac) which allows the loans to be sold in the secondary mortgage market. Conventional loans currently require a minimum down payment equal to 5% of the purchase price. Borrowers that put down 20% and have excellent credit will get the best available rates.  Conventional mortgages have a maximum loan amount which varies based on location. St. Louis area conventional loans can be up to $417,000.

Loans that exceed the maximum amount are classified as jumbo loans. These loans still meet industry guidelines, but have different interest rates. In St. Louis, loans above $417,000 fall in the jumbo category.

A borrower’s credit score has a big impact on the interest rate for conventional loans. Interest rates publicized by lenders or the media will be for borrowers that put down 20% and have excellent credit. If your credit is less than perfect, your interest rate will be higher.

There are also loan programs to help buyers that might have a hard time qualifying for a conventional loan due to their income/debts or who don’t have the 5% minimum down payment.

FHA loans are insured by the federal government so that the lender is paid back if the borrower defaults. Borrowers with low to moderate income may qualify which will allow them to get a loan, or to borrow more than they would have under a conventional loan. The downside is that FHA borrowers will pay slightly higher interest rates compared to conventional rate mortgages and a mortgage insurance premium fee.

There are two big advantages of FHA loans. The minimum down payment is only 3.5% and the interest rate is not impacted by credit scores. For borrowers that have limited down payment funds or credit scores below 740, an FHA loan may be the best option. The maximum FHA loan that you can get in the St. Louis area is $281,250.

VA loans are available to honorably discharged veterans and their widows/widowers (if they have not remarried). VA loans are guaranteed by the federal government. They have low interest rates and allow people to borrow 100% of the purchase price up to $417,000 (Alaska/Hawaii property loans max out at $625,500). VA loans are a great option for anyone that qualifies.

8. What are closing costs? How much are they?

Closing costs are fees related directly to the purchase of the home. They vary depending on the price of the home and include lender, title and recording fees. They also include other items such as appraisals, survey and inspections.

In addition, buyers pay some prepaid items at closing. Prepaid items are payments at closing for items that associated with the purchase/loan going forward, but are paid on closing day.

• interest on the loan from the day of closing until the next mortgage payment
• 2-3 months of real estate taxes to fund the escrow account
• 1 year homeowner’s insurance
• 2-3 months of homeowner’s insurance to fund the escrow account

In the past, closing costs/prepaid times were usually about 3% of the home purchase. However, recent changes in lending practices have resulted in increased fees especially for buyers that are putting down less than 20% of the purchase price or have credit scores below 740.

Buyers purchasing a home in the $200,000 price range can now expect to pay $3500-4500 in addition to their down payment. For buyers on a tight budget, these fees are often paid by the seller. Basically, buyers agree to a higher purchase price and sellers agree to pay closing costs/prepaid items. For example, a buyer that would have agreed to a $200,000 purchase price, may decide to offer $204,000 with the seller paying $4,000 in closing costs/fees. The buyer ends up with a slightly higher monthly mortgage payment (approximately $6 per month for every $1000 borrowed, equaling $24 more per month) and a slightly higher down payment (only $200 more if the buyer borrowed $204,000 instead of $200,000 with a 5% down payment).

For buyers that are tight on cash, the end result is that buyers don’t have to come up with much more than their down payment while seller’s still get their price.

9. How early should I start looking before I want to move?

You need to start your home search early enough to allow for time to get familiar with the market, find a house and then close.

The typical home purchase in the St. Louis region takes about one month from the time the contract is accepted until it closes. Closings from 3-8 weeks are also fairly common.

According to the National Association of Realtors 2008 survey, home buyers in the midwest averaged 10 weeks of searching before they wrote an offer on the house that they purchased. They also reported looking at an average of 12 homes and looked on their own for about 2 weeks before contacting an agent to assist them.

When I talk to buyers that plan to move in the next 6 months, I suggest that they start with looking at home listings to get familiar with housing inventory and pricing. About 3 months before they want to move, I start scheduling home tours for them to see their favorite home listings. You can tour homes before then, but you are setting yourself up for disappointment if you find your dream home but just aren’t in a position to move yet. Two months is more than enough time to find a new home. On the other hand, some people are looking for a needle in a haystack. If your list of home features required for your new home or your price range doesn’t match up with what is normally available in the area you want to live, then you should be prepared for a long search and moving quickly to make an offer when you do find the right one.

10. When can I move my stuff into my new house?

As a buyer, you will get the keys to your new house on closing day after you sign all of the purchase documents and all of the funds to pay for the house (the down payment AND the loan) have been delivered to the title company. Sometimes mortgage funds take some time to arrive by wire transfer, so don’t plan on getting into your home before early afternoon even if you are signing the papers first thing in the morning.

The moving situation gets more complicated for people that are selling a house and buying another at the same time.

With the current market conditions, most buyers are not comfortable with the idea of owning 2 homes. As a result, contracts are often contingent on the closing of the buyer’s home sale. In many cases, the purchase of the new home and the sale of the old home happen on the same day so that if the old home sale falls through on closing day (yes…it does happen), then the new home purchase does not close.

Sounds great, right. The buyer gets the new home, but if the purchaser of the buyer’s old home doesn’t close, then they aren’t stuck with 2 homes.

The challenge comes with getting everything moved out of the old house and into the new one.

I always recommend that my sellers move their belongings out of the house no later than the day before closing. Yes, they will pay for a night with their furniture on a truck since they can’t move their things into the new house until it closes. Still, their house sale is more likely to go smoothly if the buyers can see the house empty before closing. Plus, managing 2 closings, moving out of a house, cleaning it, and then moving into a new house all in one day is just not a good idea.

Is it ever possible to move your belongings into a house before you close? Sometimes. However, most agents don’t recommend it since your things will be in a house you don’t own. If there is a problem at closing and it doesn’t close, the situation can get complicated. Go ahead and pay for your stuff to sit on a truck or in storage pods for an extra day or two. It’s worth the extra money to ensure a smooth closing.

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