Insurance – What You Need To Know

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Before finalizing a mortgage, lenders will require buyers to purchase a minimal level of “hazard insurance.” Hazard insurance covers damage or destruction by fire, smoke, theft, vandalism or other similar events of loss. To protect your own interest as the buyer, you will want to investigate a more comprehensive homeowner’s insurance that includes liability and a higher level of hazard coverage above the lender’s requirements.

Homeowner’s Insurance Coverage

Typically, the hazard portion of the homeowner’s insurance policy covers the house itself, furnishings and personal items within the home and any other structures on the property like the pool or detached garage/pool houses. Most standard policies won’t protect again damage caused natural disasters so you’ll want to purchase additional insurance if your home is in a high-risk area for fire, floods, earthquakes and more. Also, if you have expensive art or jewelry in the house, you need to consider having them additionally insured.

The homeowner’s insurance policy also covers some types of personal liability if someone should sustain injury on your property. If your cousin Millie trips on a loose floorboard in your home, the policy will pay for medical expenses and other losses up to a certain amount. Again, this portion isn’t required by your lender, but it’s a good idea to safeguard your interest.

Insurance Due Diligence

As soon as escrow opens on the house you are about to buy, your real estate agent should set you forth on shopping for an insurance policy. Chances are, your agent will have strong relationships with several insurance agents that he/she can refer you to. If you are a long standing client with a company for other types of insurance such as car or life insurance, it would be beneficial to investigate a homeowner’s policy with that company for added discounts and perks.

Finding good and cost-effective homeowner’s insurance has become increasingly difficult in California due to high payouts for mold, fire and other disasters. If the house that you are looking to buy has a history of water damage (precursor to mold) or have issues that may make it difficult for you to obtain insurance on it, you might want to consider incorporating an insurance contingency into the purchase agreement.

Insurance Do’s

Here are a few things to keep in mind when looking for a homeowner’s policy:

1)   Know your home’s value – Establish your home’s replacement cost with a local builder.

2)   Shop around – Insurance companies differ and therefore can offer you different coverage at different pricing. Shopping around could save you money.

3)   Investigate the company beyond pricing – Some companies take a long time to service claims. If you are in a situation where you have to file a claim, it’s better to have a solidly-backed company with a great reputation on your side.

4)   Study the policy’s coverage – Make sure everything that you want protected is covered and covered sufficiently in the policy. Don’t assume that “personal property” includes every exceptional item you own. Find out how to get coverage for the things you really care about.

5)   Ask for discounts – Insurers can get creative with their fees so always ask to see if you qualify for any discounts

6)   Avoid making small claims – A history of claim-making will make you a “riskier” client and prevent you from securing a favorable policy.

7)   Review your policy annually – Keep your policy updated so that the coverage is appropriate and adequate for current value.

As with most components of lending and escrow, insurance vetting can be tedious. In shopping around, you will find that it’s difficult to compare apples to apples with policies. Make sure you understand each proposed policy and that the coverage is adequate for your needs. As always, your real estate agent should be assisting you through the process of obtaining appropriate insurance for the property you are about to buy.

Apps for the House Hunter

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If you’re in the market for a house, chances are you are turning to your smart device for help.  Today, there are numerous real estate applications available for download that can make your homebuying journey far more efficient and productive than ever.  Here are a handful of incredibly helpful apps that I’ve come across recently.

Home Search Apps

Most home search apps pull listings directly from the MLS and plot them on an interactive GPS map.  Generally, listings won’t vary between apps.  However, there are some key functional differences between the major real estate apps. Realtor.com boasts that it offers the most listings and has the fullest geographic coverage.  Zillow’s app shows you the estimated worth of any home including those not on the market.  Redfin’s app has a friendly, easy-to-navigate interface but isn’t available in every city.   Homesnap allows you to take a photo of any house and see how much it’s worth.  And Lovely is a great app for finding a rental.

Real Estate Tools

The process of buying a house is filled with real estate terminology.  For $1.99, you can download the Dictionary of Real Estate Terms app to look up terms and decipher jargon quickly.

You walk into the house of your dreams, but can you afford it?  Use the Home Buying Power app to input price, down payment, desired payment, loan terms and interest rates to determine how much house you can afford.  And no buyer should be shopping for a house without the Mortgage Calculator app handy.  This practical calculator steers you through the financing of a home by calculating rate, monthly costs, price per square foot, and amortization schedule.

Neighborhood Tools

Use Wikihood to get a tour of the neighborhood you desire.  This app can shed light on a neighborhood’s history, community info, culture, and identify companies in the area.  The Safe Neighborhood app gives users access to the National Sex Offender Registry so you can quickly determine if a home is located in a safe, family-friendly area.  Around Me is a fun, valuable app that calculates the distance to nearby banks, coffee shops and other community resources.

Home Tour Resources

Photo Measures is an app that lets you take pictures of a room and record the dimensions of that room to the photo.  This app is additionally helpful in that it refreshes the user’s memory on the various homes toured.  And ColorSmart is an app developed by the Behr paint company that can apply different paint colors to the photo of the room you just took the picture of, and help one visualize the house repainted to your taste.

There are many more apps available to assist people on their homebuying endeavor. Surely with all these incredible technological assistance, your dream home is right around the corner!

Appraisals – Part II

Appraisal Report

After a few rounds of counter offers and negotiations, buyer and seller agree on a price and the home goes into escrow. Time to celebrate? No, not just yet unfortunately. Within the escrow process, there are several hurdles to overcome, one of which is the appraisal. As we mentioned in last week’s post, appraisals are a critical component of the lending process. A low appraisal can derail the agreement reached by the buyer and seller.

Low appraisals can arise in a declining housing market due to the lack of recent comparable homes sales, making it difficult for appraisers to determine the current market value of a property. When home sales slow, good comps “age” fast. Comps of homes that sold over six months earlier generally become obsolete data and aren’t factored in the valuation. Add foreclosures and short sales to the equation and appraisal values can vary greatly depending on the appraiser’s methodology. But, low appraisals can also occur when the market is rising rapidly as appraisers may have a hard time adjusting their valuations to account for escalating market value.

The reality is that appraisals are conducted by independent 3rd parties hired by the buyer’s lender. Legislation requires lenders to use an intermediary entity who then in turn selects the appraiser, ensuring that the lender and the appraiser have no conflict of interests. The regulatory intent is to have the appraisal be as impartial as possible. So it’s not at all possible for the buyer or the seller to choose who performs the appraisal. However, if you have a knowledgeable and seasoned real estate agent representing you, he or she can be instrumental to the process. Here’s how:

  • Your real estate agent would never want his/her client to overpay for a house so chances are, during the negotiations process, he/she will be facilitating the negotiations towards fair market value, already mitigating the chances of a low appraisal report.
  • Your real estate agent presumably is an area specialist so he/she should be well-studied in the specific neighborhood of the home so that he/she might drawn upon nuanced knowledge of schools, community and other neighborhood desirability details that can be shared with the appraiser.
  • All reputable real estate agents will attend the appraisal at the home and provide a package of most relevant comps to the appraiser.
  • In addition, the agent could have knowledge of off-market home sales in the area that can impact the appraisal or conversely have knowledge of recent foreclosures and short sales that should be exempt from the valuation.

Good agents are keen to the fact that appraisers tend to draw their comps straight from the MLS but that data collected may not represent the clearest picture of market activity and value.

And should the appraisal return a lower value than the negotiated sales price despite the diligent efforts of your agent, here are the buyer’s options:

  • Negotiate a new price – sellers may entertain a lower sales price as a low appraisal is a blemish on their home should they have to put the house back on the market, or there could be other circumstances at play like the purchase of the next home contingent of the close of the current home that might increase seller flexibility.
  • Put more money down – if feasible, buyers can always bridge the difference between the loanable amount with cash.
  • Hire a new lender – a new lending entity will restart the process potentially with a new appraiser.
  • Cancel contract – contracts are typically written with an appraisal contingency to protect the buyers from having to follow through on the heels of a low appraisal.

Under any of the circumstances above, the thing to avoid while navigating the pitfalls of a low appraisal is letting the appraisal contingency period expire or else the buyer is locked into the transaction.  Again, your real estate agent should be well aware of the contingency period and would never allow the period to expire.  A seller benefits from a mutual resolution so typically they will grant an extension while the buyer vets all options.

Whether you are the buyer or the seller in a low appraisal situation, your seasoned real estate agent should be guiding you through the entire process and see you through its resolution.

Appraisals Explained

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Appraisals are a critical component of the lending process.  In any home sale/purchase transaction that requires financing, the lender will mandate an appraisal on the property.  So what exactly is an appraisal?

Often confused, a home appraisal is a separate analytical report from the home inspection.  An inspection identifies potential physical issues with the house to prevent costly repairs down the road.  An appraisal is a third party expert opinion on the current value of a piece of property.  Lenders rely on the appraisal report to ensure that they are not over-loaning on a property.  In the event a borrower defaults on the mortgage and the property goes into foreclosure, the lender recoups the money it lent by selling the home.  If the bank loaned above the value of the property, then the lender is unlikely to recoup their investment.

An appraiser is an independent and objective third party who does not have any financial stake in the transaction apart from his fee for performing the appraisal. Appraisers are state-licensed and work in regions and neighborhoods they are familiar with so they have an expert knowledge of any environmental or other concerns that may affect the value of a property.  Typically, the homebuyer pays for the property appraisal when applying for a home loan and the cost varies greatly depending on the size of the home and the experience of the appraiser.

There are two basic methods of appraisal used for residential properties. First, there is the sales comparison approach whereby the market value of the subject property is determined via “comparable” analysis.  The appraiser typically visits the home in question and obtains specific home information and statistics and then compares the data with “comps,” properties of similar kind in the same geographical area that have recently sold.  The second method is the cost approach, which evaluates value by determining how much money it would require to replace the property if it were to be destroyed.  This approach is more commonly used in evaluating new construction.

The appraiser gathers information for the appraisal report from a number of sources, but the process always begins with a physical inspection of the property inside and out.  Additionally, the appraiser may look at county courthouse records and recent sales reports from the multiple listing service. The appraisal report typically includes:

  • An explanation of how the appraiser determined the value of the property.
  • The size and condition of the house and other permanent fixtures, along with description of any improvements that have been made and the materials used.
  • Statements regarding serious structural problems, such as water damage and cracked foundations.
  • Notes about the surrounding area, i.e. proximity to schools, new or established development, lot size, relevant aspects affecting desirability and resale, and so on.
  • An evaluation of recent market trends of the area that may affect the value.
  • A comparative market analysis that supports the appraisal including maps, photographs and sketches.

Next week we will discuss how to prepare for an appraisal and what happens if the appraiser returns a value lower than your contract price.

DIY Staging Tips

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In last week’s blog post, we covered a few tips on how to prep your house prior to listing it for sale.  We discussed improving curb appeal and light remodeling to make the home more universally appealing.  To that effort, we also mentioned the importance of de-cluttering, de-personalizing and cleanliness.  So now that the house is neutral and clean, how does one dress each space to additionally enhance a buyer’s impression of the house?  This is where the art of staging comes into play.  Should you want to take a crack at staging your house, here are some few helpful tips to consider.

Furniture Grouping

Roll up your sleeves and start moving furniture. There’s a common belief that rooms feel larger if the furniture is pushed up against the walls, but it actually isn’t true.  Reconfigure your sitting areas by floating furniture away from the walls.  Reposition sofas and chairs into groupings that look conducive to conversations. Not only will this make the room feel more inviting, but it will open up the space and the area will appear larger.  Give yourself permission to remove furniture items entirely if the room requires more breathing room for better traffic flow.

Accessorize

Style your dining room table as if you’re expecting a dinner party.  Bring some greenery indoors as flowers and plants instantly add vibrancy and life into any room.  Place pleasant, non-controversial artwork or photography that befit the style of your home on walls that seem too bare.  Dress each bed with complementary linens and pillows for a comfortable, lived-in look.  For the master bedroom, remember to tow a gender neutral line when selecting bedding and accessories.

Home Lighting

Do not forget to consider lighting.  The first thing a real estate agent does when showing a home is to turn on all the lights, regardless of the time of day.  So at some point, mimic a showing and turn on all the lights in the house to give yourself the buyer’s perspective.  What you want is to make sure that your home looks warm, inviting and well-lit.  As it turns out, most homes are improperly lighted. To remedy the problem, increase the wattage in your lamps and fixtures. Aim for a total of 100 watts for each 50 square feet.  Make sure you have all three types of lighting in the house: ambient (general or overhead), task (pendant, under-cabinet or reading) and accent (table, floor or wall lamps).

Make Awkward Spaces Functional

One way to really add value to a house via staging is by creating a purpose for an otherwise awkward space.  The area under the staircase can sometimes fit a small desk for a quaint office nook.  Transforming a blank space into a practical area gives the house a feature that is memorable to the buyer.  It also gives the impression that the house is bigger and thoughtfully functional.  If you have an awkward space, check out interior design websites like Houzz for inspiration on how to give it a quick transformation.

Make Every Room Count

Most of us have a room in the house that is a “hobby room” which is a euphemism for “dumping ground.”  As part of the decluttering process, make sure the room is thoroughly cleansed and all unnecessary items are removed.  Then, give the room a purpose.  Would potential buyers want to see a guest bedroom?  Or an additional kid’s room?  Making a real room out of what was your junk room will have a big payoff on buyer impression.

The goal of staging is to breathe new life into the house, giving it universal appeal.  Chances are, while living in the house, you’ve made it work very specifically for yourself over the years.  Staging removes some of the specificity and quirkiness.  When well done, it gives buyers an idea of how to use every space well and maximizes the home’s potential for positive impressions.  Staging is immensely valuable tool in selling a house.

Prepping a House For Sale

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If you are getting ready to put your house on the market, consider a few of these tips to help maximize appeal and improve how well your house shows to prospective buyers.

1)   Enhance curb appeal.

When a house goes on the market, generally the owners have expended some thought and energy towards making the interior of the home look immaculate.  But, you only get one opportunity to make a positive first impression, so do not let the exterior of your home go untouched:

  • Power wash the house!  A quick power wash takes years of dirt off of the house, making a huge immediate difference.  Get the siding back to a vibrant state and have the windows sparkle.
  • Make sure your house number is clean and easy to read.  Visitors dislike not being able to identify the house quickly as it makes the house not feel welcoming.
  • Consider a handful of new landscaping to impress upon visitors.  Fresh greenery really enhances the appeal of the home and gives the impression that the home is well attended to.  And don’t forget to prune back overgrowth.
  • Create a welcoming front door and porch area.  This can be a simply a new door mat, a coat of vibrant paint on the front door, or a casual patio set that creates an inviting seating area.

Many of these exterior improvements can set the tone for the rest of the showing, impressing upon buyers the feeling of a cared-for home, one of steady maintenance and quality upkeep.

2)   Make obvious repairs.

Now is a good time to attend to the small repairs that have accumulated over the years of living comfortably.  Broken window pane, cracked deck tiles, non-functioning light fixtures – addressing the visually-obvious issues beforehand helps touring buyers stay focused on the big picture of whether the house is a good fit for their needs.  Removing these detracting items paves the way for a smooth and favorable showing.

3)   De-clutter and depersonalize.

Buyers want to envision their belongings in the home they are touring. Help them see that vision by removing personal effects such as framed photos, tchotchkes, extra items of furniture, and toys.  The idea is to have the house look generic and spacious.  The old adage “less is more” is sage advice to heed.  Hire a cleaning crew to deep clean the house and have every surface return to near-original glory.  Keep in mind that people during showings may check out the closets and cluttered closets imply lack of storage, so definitely make a pass at organizing and filtering through your closet spaces.

4)   Neutralize.

The teal accent wall highlighting the dining room might be too bold for some buyers.  If you are going to make some light redecorating changes, consider going neutral in the choices you make.  A neutral palette is generally received as welcoming and will appeal to the majority of the people walking through the house.  Complementing color can be added through linens and bedding and décor items.

Once the house has been prepped, then the discussion can progress to furniture staging.  Stay tuned next week and we will provide some staging advice.

Boosting Your Credit

 

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Several blog posts ago, we covered what you ought to do in anticipation of an imminent home purchase.  One of the “must do’s” was to check your credit as your credit score is a critical factor a lender considers in their underwriting process that goes into determining the details of your loan package.

For that reason, it’s incredibly relevant for you to check your credit report and score with the three credit bureaus: Experian, TransUnion and Equifax. Each bureau will yield different credit scores so it’s pertinent to cover all three.  Upon receipt of your reports and scores, carefully review them and see if there are ways to improve your credit profile as often times the reports will include incorrect information and errors.

Boost Your Credit Score

Here are a couple of actionable steps to take that can boost your score over time:

1)   Pay your bills on time and in full when possible.

2)   Don’t open new lines of credit.

3)   Try to reduce your credit card debt to 25% or less of your credit line on each card.

4)   Don’t close your credit card accounts because then you’ll be using more of your overall credit limit.

5)   If you have an old credit card that you haven’t used in awhile, use it and then pay the bill in full to show that you can responsibly handle credit.

6)   Bring your over-the-limit and past-due accounts up-to-date.

7)   If you have any collections or judgments against you, pay them off as quickly as possible.

A reputable lender can suggest specific actions on how to deal with errors in reporting so it’s smart to develop a relationship with a lender early in the home buying process.  Additionally, lenders can tell you what minimum credit score is required for a particular loan program.

While lenders look at many factors when evaluating you for a mortgage loan, including your debt-to-income ratio, your income and assets, how much your down payment will be and your job history, your credit score is a vital determinant toward a favorable loan package.  Therefore improving your credit profile is clearly in your best interest during the months before beginning a serious home search.

The Pre-Buying Don’ts

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In our last blog installment, we discussed some pre-buying do’s.  Equally important to your home buying preparatory work are several pre-buying don’ts:

1)   Don’t Go Credit-Crazy

As previously mentioned in the “do’s” post, it’s smart to monitor your credit in the months leading up to a home purchase.  With every new line of credit opening, your credit score gets dinged.  So if a creditor solicits you for another amazing credit card with major perks, don’t bite during this crucial time.  Avoid any financial transactions that require inquiry into your credit health.

2)   Don’t Get Behind on Bills

Having a late payment hit your credit report before closing can impact your ability to get the loan you need.  Payment history comprise about a third of your credit health.  Many banks require 12 consecutive months of on-time payments to qualify for a loan in the first place.  A 30-day late blemish could cause lenders to rethink your loan application all together.

3)   Don’t Switch Jobs

Any change in employment is a significant risk from a lender’s perspective.  Lenders desire clients with stable, reliable income and generally will ask you to provide a picture of income stability during the underwriting process, as stability equates to the less likelihood of default in the their eyes.  During this crucial time of financial scrutiny, don’t switch jobs, don’t go entrepreneurial and become self-employed, and certainly don’t quit your job.

4)   Don’t Buy Anything Major

Don’t buy a car or truck or any other form of transportation that you have to finance.  Buying one increases your debt-to-income ratio and that’s something loan officers don’t want to see.  Additionally, don’t buy furniture or major appliances before buying your new house.  Like financing a car, charging big-ticket items negatively impacts your financial standing.  Keep yourself in good graces with your lending institution by minimizing your large expenditures.

The process of purchasing a home can be long and complicated.  From the moment you decide to become a homeowner until you close on your dream house, you want to provide a clean bill of credit so that your home gets financed favorably. Even if you have good credit at the beginning of the journey, there are ways to blemish your qualifications and make lenders think twice.  Being fiscally absentminded or slightly irresponsible with your credit health could cost you down the line.

 

Getting Ready to Buy? A Few Do’s.

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You’ve been flirting with the market for months, touring open houses on the weekend and logging in late night hours on Redfin or Zillow.  You’ve pinpointed the ideal neighborhood that suits you best and have toured the schools in the district.  You are ready to take the plunge and buy.  What next?  A few do’s:

1)   Get a Realtor

A seasoned real estate agent can provide you with valuable insights on homes and neighborhoods during the search portion of your house hunt.  And even with the proliferation of online real estate search engines, when the time comes to write an offer, you will need an experienced real estate professional on your side to navigate the negotiations, escrow and closing process with you.  Over the years, the laws for home buying have become increasingly complex and the process is filled with many moving parts.  Ask your trusted friends for quality agent referrals and find yourself a good teammate.

2)   Get Preapproved for a Loan

Consulting a mortgage lender will help you get a clear picture of your purchasing power so make this step at the top of your list of to do’s.   Understanding what you can afford from a lending perspective helps define your house search so you don’t waste time looking at homes you cannot afford.  Plus, often the market moves fast on well-priced homes, so having a pre-approval letter in hand lines you up at the front of starting block.

3)   Make A Checklist of “Must Haves” in a House

No two houses are the same and no house is ever 100% perfect, but having a checklist for your ideal home is useful so you are efficient in your house hunt.  A house can always be redecorated to perfection but it’s a bigger headache if your new house is missing that home office you had hoped to have.

4)   Check Your Credit

Your credit score helps lending institutions determine the rate and terms they can offer you on the loan.  If your credit is high, meaning that your credit history indicates that you are fiscally responsible, lenders will see you as a low-risk investment and offer you a lower rate on your loan with good conditions.  If your score is low, lenders will think you are a riskier investment and charge you with higher interest rates to take on the perceived risk.  Get your credit scores from Equifax, Experian and TransUnion, the three major credit agencies, so you can see how you stack up in terms of investment risk and see if you have time to improve your credit health.

Stay tuned next week for a list of pre-buying don’ts.