Buying vs. Renting

by Dan Krell
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Is buying a home right for you?

A home owner recently told me that he had no idea that he would be able to sell his home for more than double his purchase price. When he purchased his home eighteen years ago, he recalls having kept to a strict budget so he could afford his mortgage payments and other related housing costs. Now, he will have a sizeable profit from the sale to purchase his dream home. This home owner’s story is like many other home owners’ stories of wealth building through home ownership.

Unfortunately, due to recent market fluctuations, some home buyers have questioned the value of home ownership. Decreased consumer confidence along with almost daily stories of foreclosure might make you wonder if any homes are selling.

Additionally, some renters feel that home prices continue to be too expensive for them to make the jump into home ownership. Economic commentator, Barry Ritholtz (bigpicture.typepad.com), believes that too; although the rent to buy cost ratio for the Washington area has dropped significantly from an all time high of 21.4 to around 16.6 (according to Moody’s economy.com), he feels that home prices are still too high nationwide as compared to the rent to buy cost ratios of the 1980’s and 1990’s (when the average ratio ranged from 10-14). However, even with a decreased consumer confidence, many understand the benefits to home ownership.

Many analysts and commentators agree that owning a home is typically better than renting. For example, Suze Orman has stated in a Yahoo Finance exclusive (biz.yahoo.com/pfg/e10buyrent) that “there’s no better investment.” Although Ms. Orman does strongly suggest having your financial matters in order as well as making certain that you can afford all the housing related costs before you make a move, she does state that “home ownership is a great achievement and a terrific investment.”

Although the benefits of home ownership are touted by many in the industry, owning a home is not for everyone. Renting does offer limited maintenance and the flexibility if you need to move, but home ownership offers tax incentives (tax breaks and deductions) as well as a chance to build equity.

Before you buy your first home, you might consider how long you intend to live in it before selling. For example, the National Association of Realtors reports that the typical home owner intends to stay in their home for ten years (although the actual time of ownership varies). Financial and affordability factors to consider before buying a home include interest rates and market conditions. However, some considerations are not financial but emotional; for example, some renters are concerned about their security deposit as well as dealing with an obnoxious landlord or management company.

Freddie Mac (FreddieMac.com) offers the following benefits to homeownership: Owning a home can facilitate your participation within a community, the home can be passed through many generations as a source of security, the tax benefits typically offset the amount you might otherwise pay for rent, your monthly payment won’t increase if you have a fixed rate mortgage, and building equity through home ownership “is the single greatest source of financial security and independence for the majority of people who’ve taken this step.”

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of June 16, 2008. Copyright © 2008 Dan Krell.

Before you buy- First time home buyer fundamentals

by Dan Krell © 2007
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Don’t let your first time home buying experience be overwhelming. Before you plan your Sunday trip to open houses, it’s important to review the fundamentals and make sure you are going into your home purchase fully aware of the responsibility you are about to take on, as well as prepare you for the process and pitfalls that may come your way.

The first item on the list is to determine how much you can afford. Affordability is determined by your financial state and interest rates. Your financial state includes factors such as your income, debt, savings, and expenses. Interest rates impact on your ability to purchase a home because your monthly payment is based on the rate you lock into; the higher the rate, the higher your payment.

Once you know how much you can afford, make a housing budget. Making a housing budget can help you understand your expenses, which included utilities, maintenance, and other expenses such as cable and internet. Additionally, take into account any interest rate adjustment (if you have an adjustable rate mortgage) and increasing real estate taxes. Many first time home buyers get into trouble because they underestimate their monthly housing expenses, as well as not accounting for rising mortgage payments and real estate taxes.

As a first time homebuyer, you will want to be aware of any special programs that are available to you. There are many local home buyer programs that offer special financing and/or closing assistance through the county, the Housing Opportunities Commission, as well as through banks and organizations.

Talking to a lender can help you understand your credit and how much you can afford. You should compare lenders for interest rates and fees. Lender fees vary significantly and by choosing the right lender, you can possibly save several thousand dollars at settlement.

Knowing your rights as a home buyer can help you prevent problems that may occur. As a homebuyer, you are affected by federal and local fair housing laws, RESPA (Real Estate Settlement Procedures Act), Equal Credit Opportunity Act, Fair Credit Reporting Act, and the Truth in Lending Act. Your real estate agent should be aware of these laws and can help you understand them. You can get more information about these laws at the HUD website, HUD.gov.

As a first time home buyer it is important to know that you have the right to choose your service providers, such as real estate agent, lender, title company, insurance company, etc. Additionally, you have rights specific to obtaining a loan and credit, such as the right to a good faith estimate of settlement charges and interest rate and other disclosures. A list of these rights can be found at the HUD website (www.hud.gov/offices/hsg/sfh/res/resborwr.cfm).

Your next step will be to choose a real estate agent. It is recommended to interview several agents before choosing as your agent will be your trusted guide through the home buying process. A good real estate agent will know and protect your rights, as well as know what home buyer programs are available to you.

Finally, HUD recommends that first time home buyers attend housing counseling to assist in learning these and other fundamentals. It is clear that doing your homework and choosing the right professionals to assist you can make the difference in your home buying experience.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of July 9, 2007. Copyright © 2007 Dan Krell.

Know Thy Lender

by Dan Krell © 2007

To protect the public interest, most professionals involved in real estate transactions in the state of Maryland are licensed. Realtors, title attorneys, real estate appraisers, and insurance agents are all regulated by the State. As of January first loan officers working for mortgage brokers, or as they are now titled mortgage loan originators, are now regulated as well. Loan officers working for federally chartered banks are exempt. The law is the fruition of efforts to help curb the fraud, predatory lending, and other problems that exist in the industry.

Make no mistake, the mortgage industry is already heavily regulated by the Federal Government as well as the State. Mortgage loans that are originated are required to comply with federal regulations such as the Truth in Lending act, regulation Z, the Fair Credit Reporting Act, and the Real Estate Settlement Procedures Act. The state of Maryland has additional requirements that need to be met as well.

By licensing mortgage loan originators, the state of Maryland has placed accountability directly on the loan officer. Many are hoping that the new licensing laws will force loan officers to do their due diligence and act responsibly such as when issuing approval letters, loan commitments, or rate locks. Additionally, the new regulations will help curb predatory lending and hopefully reduce settlement table surprises.

Before January first, consumers’ source of recourse was to make complaints against the mortgage company to the Maryland office of Financial Regulation and/or the Maryland Attorney General’s office. Now, an offending loan officer will be held accountable for his/her actions and misdeeds and may face penalties for violations.

Another positive aspect of the new regulations is the limiting of opportunists that come and go when the market is favorable and hopefully weed out those with bad intentions. In addition to a criminal background check and finger printing, requirements for licensure include either three years of experience in the lending industry or the completion of a forty hour “pre-licensing” class.

Although the law went into effect on January 1, 2007, a recent Baltimore Sun article (Md. Warns Loan Officers: Get License, 12/22/2006) stated that many loan originators had not filed for their license and boasted about their intentions of not filing. Maryland regulators are taking this seriously as they are planning to “round up” those violators. The bottom line is, as stated in the article by the deputy commissioner of financial regulation, if someone is talking to the public they need to be licensed.

As a precaution, the Maryland Association of Mortgage Brokers offers these suggestions to consumers: never sign a blank document; read all documents carefully and ask questions and don’t be hurried into signing anything you do not clearly understand; stop the entire transaction if you feel you are not getting clear answers; be wary of telephone or mail solicitations, especially if the promises seem “too good to be true”; do not be pressured into applying for more money than you need; even a small increase in the total loan can result in big interest payments over time; get copies of all loan documents, especially anything you have signed.

If you are unsure of your loan officer’s license status you can check with the Department of Labor, Licensing, and Regulation (www.dllr.state.md.us).

This column is not intended to provide nor should it be relied upon for legal and financial advice.  Copyright © 2007 Dan Krell .

Why Title Insurance is Important

Title insurance should not be an enigmatic item listed on the settlement sheet, and there should be no question as to its validity. Here is a very basic explanation of why title insurance is important.

Title insurance, like other forms of insurance, is governed by the Maryland Insurance Administration (MIA). Title companies and title attorneys are licensed by the State to sell title insurance.

Title insurance is important because it’s an assurance that the home buyer receives a clean title from the home seller. Clearing a title of all liens and mortgages is not always an easy task. The first step is for the title attorney to order a title abstract.

A title abstract is simply a synopsis of the chain of title, or a history of ownership, that has been recorded in the office of land records in the county court house. The title abstract indicates all owners, mortgages, liens, encumbrances, and easements attached to the property. The title abstract also indicates previous sales and mortgage and lien satisfactions.

Because all the information in the title abstract is obtained from recorded information, it is inevitable that mistakes occur. For example, it is common for mortgage release letters to be lost, misfiled, or never filed at all. Sometimes there are years of information that is lost or destroyed resulting in a break in the chain of title.

Once received, the title attorney will review the abstract and look for any blemishes including unreleased mortgages or liens and breaks in the chain of title. If there are any blemishes found, they need to be cured before issuing a clean title. The home seller can remedy most blemishes by supplying all required documents or paying to release attached liens and mortgages. Sometimes it may be necessary for the home seller to show their title insurance policy so as to indicate they were given a clean title.

Sometimes there are items not filed in the office of land records that may affect the ownership of your home. Some of these items may be heirs of previous owners or undocumented lien holders who may make claim to your home. Title insurance can protect you from these claims. It is rare, but making a claim with the title insurance company can resolve these issues.

Lenders believe title insurance is important. If you are obtaining a mortgage to purchase the home, your lender will require “lender’s coverage” title insurance. The lender’s coverage protects the lender in case there are any unrecorded liens, easements, or other unrecorded defects.

Just as in other insurance policies there are different levels of coverage of title insurance. A basic owner’s title insurance policy typically assures clear title to the property and covers against incorrect signatures, on documents, forgery, fraud, and defective recordation of covenants, encumbrances or judgments.

Extended coverage may include coverage for building permit violations from previous owners, covenant violations from previous owners, living trusts, and a variety of encroachments and forgeries. Title insurance does not cover against liens placed after the effective date of the policy.

Policies and limitations vary, consult your title attorney for more information. Some policies cost more than others because of the difference in title insurance companies and levels of coverage. When comparing title companies, you should also ask about title insurance coverage and rates. You can access more information about title insurance at the MIA website, www.mdinsurance.state.md.us.

by Dan Krell

Copyright © 2006

Homebuying tips for First Time Homebuyers

Every homebuyer needs information and support to help them maneuver through the sometimes confusing and often overwhelming home buying process. Even for veteran home owners, who are moving up to a larger home, the process can be perplexing and overwhelming. If you are a first time homebuyer.  However, you will definitely need specific information to help you through the wonderful experience that is home buying. Here are a few tips for first time homebuyers.

One of the most important tips for first time homebuyers is to look to the professionals who assist you through the process. Choosing the right professionals whom you can trust is important. Your lender, Realtor, home inspector and title company can make the difference between having a great first time home buying experience and a regretful experience.

The very first thing that you should do is consult with a lender to get pre-qualified so as to know how much home you can purchase. In order to do that, you need to find a lender. From the outside, choosing a lender might seem as simple as looking at the rates in the paper to see who will give you the best interest rate. However, it is not that simple. The rates and ads that appear in the paper are usually teasers to get you to call. I have found that many buyers that I have worked with either have used their local banks or have developed a relationship with a loan officer from a local mortgage company. Using your local bank or credit union can be good because they know you and want to make you happy to keep your business. Who ever you chose, make sure they can deliver what they promise.

I have found that many homebuyers do not put much thought into the Realtor that helps them purchase their home. Some of the ways that homebuyers have found their realtor include referral, internet, and open houses. Many Realtors have a strong referral base of past clients and friends where many homebuyer referrals originate. The referral is a wonderful way to find a Realtor because the person that referred you obviously trusts the Realtor to help you with your major purchase. Make certain the Realtor you chose can give you the time you need, as a first time homebuyer, to help you understand the process and make the right decisions.

Two of the lesser considered professionals that play a role in your home buying experience are the home inspector and the title company (or attorney). Choosing competent home inspector is important to the quality of your home inspection. In choosing a home inspector, you should interview them to understand their philosophy in conducting the home inspection and what kinds of defects are important to address. In searching for a home inspector, one good place to start is the American Society of Home Inspectors (www.ashi.org).

Choosing a title company or title attorney can be a bit more confusing because title work and title insurance seems very straight forward. You should interview a few title companies or attorneys before you choose so you can get an idea how they will conduct your settlement. Again, the title company or attorney should give you enough time so as you can understand the legal issues that surround your home purchase.

If you are uncertain where to begin in choosing the right professionals to help you in your purchase, you might consider attending first time home buyer classes. One place to start is the Housing & Communities Initiatives, Inc. (www.hcii.org), a local non-profit organization.

As a first time homebuyer, you will require additional time and support from the professionals who will help you buy your first home. Referrals and interviewing is the good way to start to develop the necessary relationship to build your trust.

By Dan Krell.
Copyright © 2005.