Real Estate Questions (And the answers you need to know)
If you were suddenly experiencing chest pains, you'd almost certainly consult your family doctor. If you were faced with a serious legal problem, you'd likely call a competent lawyer. In other words, when you have life-changing decisions to make, you want to be sure you get the best advice possible from competent experts.
Knowledgeable Realtors Know the Answers to Your Real Estate Questions
The same is true when you're buying or selling a home. Although most people buying or selling their homes work with a real estate agent (for example, in 2015, 89% of people used a realtor to buy or sell their home), some still go it alone—and that can be a costly mistake.
For example, according to Realtor, the average selling price for FSOB ("for sale by owner") homes in 2016 was approximately $185,000. For sellers who worked with a realtor, the average selling price was more than $245,000, an increase of more than 30% in sales price.
Why You Need to Work with an Experienced Realtor
Knowledgeable, licensed realtors understand the ins and outs of the real estate industry and can help you navigate what can otherwise be the often-confusing process of buying a home. Because of that knowledge base, they can help you ensure you target only homes you can afford, that you have the money you need to cover your down payment and closing costs and that you get answers to your most pressing questions in a timely manner.
Although every home buyer is different, and each has his or her own set of questions, some of those questions are more common than others. Here, then, are 18 of the most common questions home buyers have, along with the answer to each:
1. What Do Preapproval and Prequalification Mean for a Mortgage?
Imagine falling in love with the home of your dreams, crunching the numbers on your own and making plans based on those numbers, only to find out later that you're not able to borrow the amount of money necessary to afford it. Imagine contacting a real estate agent for that home, only to find out he or she won't show it to you. The preapproval process is intended to obviate these and other problems.
The process begins with "prequalification," in which the lender uses information provided by the prospective home buyer to estimate the amount the buyer is qualified to borrow. Once the lender verifies this information based on documentation, the buyer is pre-approved to borrow a certain amount of money.
Preapproval, however, means more than simply getting an estimate of how much you're qualified to borrow. It also helps you tailor your home search by eliminating homes you can't afford, and in this way, saves you time and energy. In addition, once you've been pre-approved, you can estimate how much your down payment and closing costs will be.
Finally, the fact that you get preapproved demonstrates to the seller and real estate agent that you're serious about buying the home. In fact, most real estate agents require that borrowers be preapproved before they'll show them homes, especially in the case of more expensive homes. This helps them weed out people who either can't afford a home or are more window shoppers than serious home buyers.
2. Do I Need to Sell My Current Home before Buying a New House?
This can be a bit tricky. For example, if you buy a new home before you sell your current one, you could find yourself financially strapped as you attempt to pay two mortgages at the same time—and, of course, there's no guarantee as to how long it will take to sell your home. On the other hand, if you sell your current home before closing on your new one, you'll need to find another place to live in the interim, typically through a rental, and that's also wasting your money.
It is possible to sell and buy simultaneously through what's called a "sale contingency." This is an agreement in which you essentially make the purchase of your new home contingent on the sale of your existing home. Be warned, however, that not all sellers will agree to these conditions as they might wish to settle on a fixed timeline.
3. How Long Does It Take to Buy a House?
The amount of time it takes to buy a home varies widely depending on many factors, such as current market conditions and how picky the buyer is. In general, however, you can expect it to take between 30 and 45 days to complete the home buying process.
The hotter the real estate market, the longer it usually takes to buy a home, because everyone involved in the transaction—such as the real estate agent, the lender, the home appraiser, and the inspector—are busier and tend to have a larger backlog of properties on which they're working. Said differently, how long it takes to buy your home is largely a function of whether you find yourself in a seller's or a buyer's market.
4. What Does a Seller's Market Mean?
A "seller's market" is just what it sounds like—a time when industry conditions favor the person selling a home, this because more homes are selling, and the price for those home is on the rise. The is how UpNest defines a seller's market:
"A seller's market occurs when the demand for homes outpaces the available supply. One handy way to determine exactly when the market enters the "seller's phase" is when the ratio of sales to listings hits 55-60 percent, or three sales for five listings."
Several factors tend to drive a seller's market. For example, when a local economy is strong, new jobs are created, something which causes more people to move to the area, people who need homes. Another is lower interest rates, which makes mortgage payments less expensive and homes more affordable. Finally, when more people are buying homes, there's a shortage of homes for sale, which tends to drive up their price.
5. What Does a Buyer's Market Mean?
In a buyer's market, economic conditions tend to favor the home buyer over the home seller. Those conditions are the opposite of what happens in a seller's market. In a buyer's market, for example, fewer people are buying homes, which puts the onus on sellers to reduce prices. One of the reasons is that interest rates are increasing in a buyer's market. As a result, mortgage payments will be higher, which means sellers need to lower prices to accommodate that increase in a way that reassures people to continue buying homes.
6. As a Home Buyer, Do I Pay the Real Estate Agent Commission?
The simple answer is, "no." Real estate agents do get commissions, but those come from home sellers. This is because the agent must front costs for marketing the home, usually by advertising it with several listing services, as well as through their website, television, radio and print ads. Real estate agents who represent home buyers, on the other hand, get paid by the listing broker, this as compensation for bringing that home buyer to the broker.
7. How Good Does My Credit Score Need to Be to Buy a House?
There's no simple answer to this question. Generally, the higher your credit score, the lower your interest rate (and thus the lower your mortgage payments) will be. This is because a lower credit score means you pose more or a risk to the lender. Although every real estate transaction is different, however, a good rule of thumb is that you should have a FICO score of at least 620 to qualify for a loan.
8. How Much Will My Down Payment Be on a House?
There's no fixed price for a home down payment—rather, it's calculated as a percentage of the price of the home. In other words, the higher the price of the home, the more money you'll need for your down payment. The other major variable in is whether you're buying your first home. If you are, the amount of your down payment will typically be lower than it would for a repeat home buyer.
On average, nationally, people need to put down 11% as their down payment. So, if the value of the home is $300,000, the down payment would be 11% of that, or $33,000. For first-time home buyers, on average the down payment is much less, typically from 3% to 5%. In the case of the $300,000 home, that means you'd need to come up with $9,000 to $15,000. If you obtain an FHA loan, your down payment will be 3.5%, or $10,500 using this example. Finally, some special loan programs, like those from the VA and USDA, require zero down payment for qualifying home buyers. Be sure to speak with your real estate agent about all these options.
9. How Many Homes Should I Look at before I Buy a House?
Some people will tell you that you should never buy the first home you visit, or that you should view at least 5 homes, or 10, or 20. The truth is that there's no hard a fast rule for how many homes you need to visit before settling on the one that's right for you. Only you know what you're looking for in a home, and, although your real estate agent can help, only you can decide when you've found the home of your dreams.
Obviously, the more specific your needs, the longer it's going to take you to find a home that meets all your needs, and that typically means viewing more homes before you buy. Fortunately, technology makes it easier to view multiple homes today than it used to be. Most realtors have efficient and consumer-friendly websites that enable you to check out homes—with scores of high-quality photographs, descriptions and even videos—to weed out those which don't meet your needs, and that cuts down on the number you need to view "in person."
10. What is Earnest Money? How is Earnest Money Different from a Down Payment?
If several people are interested in buying the same home, the real estate agent needs some demonstration of who's serious, and who isn't. For this reason, they ask that you front what's called "earnest money," which demonstrates that you're serious about buying the home. Typically, this is from 1% to 2% of the homes selling price—so, for a $300,000 home, this would be between $3,000 and $6,000. Paying this money essentially reserves the home and cuts off other potential buyers. Think of earnest money as a deposit on the house.
That money is held in an escrow account until you close on your home. If the deal goes through, your earnest money is applied to the down payment. If for some reason the deal doesn't work out, you get this money back—so you're not really risking anything by fronting this cash. You should note, however, that if you're the one who pulls out of the deal, you might not get this money back, so you should be relatively certain that you want a home before you pay earnest money.
11. If the Seller Rejects My Offer, Did I Lose the House?
The answer is, "no." Sellers have a goal for the sales price of their home and will work hard to get the amount they have in mind. Sometimes they can get that amount, and sometimes they can't, which means that the final sales price is part of a process of negotiation.
Let's say for example the seller wants $250,000 for his home and you offer $235,000. If the home has been on the market for a long time and there are no other potential buyers, the seller might accept your offer. If the home has only been on the market for a few days, it is much less likely the seller will accept a lower offer due to the fact that their home is "fresh" on the market and sellers' hopes are generally high at this stage of the listing.
If there's another buyer, the seller might force you and that buyer to compete with one another, rejecting both initial offers to get the price up. So, the seller might make a counteroffer, say to cut the price by $5,000 and offer the home for $245,000. You could respond by offering $240,000. The point is, the fact that your initial offer is rejected doesn't mean the deal is dead—it just means you and the seller need to work together (with the help of your real estate agent) to agree on a final price.
The rapidness of the negotiation period is greatly accelerated if the home has only been on the market for a few days and potentially has multiple offers (or the listing agent has been advised that multiple offers are going to be submitted).
12. Does It Make Sense to Have the Home Inspected?
This one is easy—absolutely, you need to have a home inspected before you sign on the dotted line. In the first place, some loans (like FHA and VA loans) require home inspections. Equally important, a home inspection will reveal many potential problems with the home, and some of those can end up costing you a lot of money if they go undetected.
For example, the inspector will check out heating and air conditioning, the plumbing and electrical systems, the roof and attic, insulation, walls, ceilings, floors, windows, and doors. He'll also make sure the structural foundation is sound. Bottom line: you should never buy a home until and unless it's been thoroughly inspected.
13. What is the Option Period?
The option period is a set number of days in the contract where a buyer can conduct inspections on the home. The number of days for the option period is agreed upon by the buyer and seller. During this option period, the buyer may walk away for any reason and the earnest monies are returned to the buyer (in Texas).
14. What is Option Money?
Option money is the "consideration" given to a seller for a buyer to have the right of the option period. Most of the times the option monies are a nominal fee of anywhere between $100 and $500. The hotter the market, and the more expensive the property, the greater the option money.
15. What does a Title Company do? What is Title Insurance?
Title insurance is issued by a title company. It is a type of insurance that is required by a mortgage company. The title insurance basically gives you the peace of mind that nobody else has a claim to either the land or the home you are purchasing. Title companies do "title searches" prior to issuing the insurance and they guarantee that once you purchase the property, all persons in the past (who once owned the land or home) have signed off on selling the property. This is what is called the chain of title.
Title companies also "close" the transactions in Texas and distribute all monies accordingly.
16. Why do I need an appraisal?
If you are getting a mortgage loan, your lender will require that the home is appraised to make sure it meets your loan value. If the appraisal does not meet the contract value, only three remedies are available to the buyer and seller. (1) The buyer may terminate the contract prior to closing. (2) The seller may lower the contract price to the appraised value. Or, (3) the buyer and seller can negotiate a different price. In the last instance, the buyer will have to come up with their own cash in order to make the deal work. The bank will not loan money on a mortgage above the appraised value.
17. Why do Homeowner Associations exist? Aren't they bad?
Homeowners associations exist in order to try and maintain the value of the neighborhood. In some subdivisions, the HOA dues are mandatory. In other neighborhoods the dues are voluntary. Homeowner Associations police things in the neighborhoods like your neighbor who refuses to cut his/her grass and is a detriment to the values of the other owners in the neighborhood.
Generally speaking, homeowner associations are good and can help maintain the value of the neighborhood by keeping it clean and neat.
18. What's the difference between a condo and a townhome?
When you own a townhome, there are generally no shared walls and your front entrance is to the first floor exterior of the building. In addition, owning a townhome means you also own the land beneath the structure. Townhouses may be two or three stories.
Condos are generally one level and exist in complexes or buildings where the complex might be up to three stories tall, while condo buildings might be 10 or more stories. In a condo, you only own the actual unit. You do not own any of the "common areas" like the pool, lobby, parking facilities, etc. Most of the times the HOA dues on condos will be more than they will on a townhouse because there is more to maintain within a condo building.
There's a reason almost 9 of every 10 home buyers work with a competent real estate agent. There are many potential pitfalls to the home buying process, and you need someone in your corner, making sure you do due diligence, that all your T's are crossed and I's dotted, and that you don't make any significant mistakes along the way.