Steps to becoming a homeowner

This was originally published on Monday, January 25, 2016, in the Pacific Daily News.  Click here to subscribe to the PDN.

The process to buying a home can be lengthy. Preparing your finances, securing an agent and then finding a home you want can take months. At this point you are almost in the home stretch. Although you can see the light at the end of the tunnel, be prepared for a lot of paperwork.

Your agent will draft an offer letter to present to the seller’s agent. This can be one of the most stressful steps in the home buying process. Using information that your agent has on the property, you and your agent will decide on how much you want to offer the seller. Remember the seller wants to get the most from you and you want to give the least amount possible. Somewhere there is a happy medium and your agent will try to find it. Some of the information to consider are:

  • The housing market. Is it a seller’s or buyer’s market? If there are many houses in the area to choose, the seller is usually at a disadvantage due to competition. If there are a fewer homes then the seller has the upper hand.
  • How long the property has been for sale? If the house has been on the market for a while, the seller is incurring costs with the property just sitting there. They may be more inclined to sell. Just the opposite if the house is new to the market, the seller may want to test the waters and see what top price they can get and may hold out for a while.
  • Why is the house being sold? If the house has been foreclosed and the bank is trying to recoup its money , the bank may want to sell it quickly. If the house has been deeded to the seller without a mortgage, the house may stay on the market longer. If the seller is leaving island or has purchased a new home, they may be willing to sell faster.

Your agent takes this and other information and deduces a price. The agent offers the price to the seller’s agent. If the seller disagrees, they may counter with a different offer. This process can go on for a while. During the negotiation, those repairs you were asking for may also be included.

You should also take into consideration that the seller may have multiple offers. Once a price is agreed upon the next step is to go through escrow.

Escrow clears property

Escrow is when a third party steps in and ensures that the steps to closing are done properly. The escrow company handles all the money that is exchanged and sees that all conditions are met. At some point, the property will have to be appraised. This could be a condition of your offer.

You may also want to have the house inspected, especially if it is an older house or if the house is in a special zone such as flood or tidal. You may also require that the house be inspected for pests. A house infested with pests could have structural damage. The seller is required to mention any major damage to the home.

If the property is a foreclosure and the bank is selling it, it may be sold as is. An important step a title insurance company takes is to check if the title of the home is free and clear. In other words, there are no outstanding lawsuits as to who owns the land and all property taxes have been paid.

Once the escrow company is done clearing the property for sale, the next step is getting the home insured. Most banks require that insurance be purchased before the house is occupied. Majority of the time the bank will ask you who you want to insure your home with, and will work with that insurance company. The monthly payments for the insurance may be included in your monthly payments.

The last step is signing the multiple copies of documents at the bank. Once the documents are completed, the keys are handed over and you are now a homeowner.

Take pride in the steps you accomplished and enjoy your new home.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Find agent who prioritizes you

This was originally published on Monday, January 18, 2016, in the Pacific Daily News.  Click here to subscribe to the PDN.

Whether it is your first home or you are a seasoned home buyer, you need to have an agent or realtor with whom you can trust and feel comfortable. Of course you can go online and look for available properties and call the seller’s agent, but their priority is the seller’s interest. That interest is selling the home for top dollar. This conflicts with what you want, which is getting the best value for your dollar.

When choosing an agent, find someone who is familiar with home trends, understands your needs/wants and is readily available. The agent should be flexible to show you houses when you are available. You may want to ask friends and family about their agents and their recommendations or precautions.

Most agents will ask you to sign an exclusivity contract. This is very normal. The contract protects the agent who should work tirelessly for you. It would not be fair if they put hours of hard work into finding you a home, and you leave for someone else. Some of these contacts can be as long as ninety days and as short as thirty days. Decide on a length that you are comfortable with. Maybe start off with a thirty-day agreement and work your way up. By taking the shorter contract you are not committed to paying someone who completely misses the mark. Some agents can represent both the seller and the buyer. Be careful, that could put all parties involved in situations that most would like to avoid. Your agent should be pleasant but a good negotiator of your interests. If your agent helps close on a house, the seller usually pays your agents fees.

‘Be realistic’

Now that you have an agent, list exactly what it is that you want in your home. Be realistic. Unless you are building the home from the floor to the ceiling, not every house will have exactly what you want. Your agent should be honest with you and let you know if those expectations are within your budget. Your agent will start looking at homes that fit your demands. Of course you are more than welcome to search as well. Today’s access to the Internet gives you the opportunity to look as well. Get online and search “Guam MLS.” The MLS is the multiple listing services. Many major real estate companies will have a link to it on their website.

To make your search easier, the MLS has questions to refine your search. You can choose your location, price range, number of bedrooms and bathrooms and even special amenities such as a view of the ocean or on a golf course. Choose as many filters as you like and the website will show you what is available. Take note that too many filters can reduce the number of available homes to you. Many of the homes have pictures and video of the property. If you see something that you like, let your agent know.

Once you decide to look at a home, your agent will arrange a time to meet with you. Do take into consideration that not all homes that are for sale are vacant. Many of them have the sellers still living in them and you may have to work around their schedules as well.

Once inside try to keep an open mind. Don’t judge the house by the furniture in it. It is almost certain that you and the current owner do not have the same taste.

Take a look at the flow and functionality of the home. Imagine your furniture, wall colors and your family living in the home. Do not harp on the little things. Many of those can be included in the selling negation if you decide to buy it. Be sure to ask questions. Does it have a septic tank or is the house hooked up to the sewage system? Have any major renovations taken place? If so, ask why. Does the home have extra fees like monthly common area fees? By looking at many different homes you may decide that what you wanted in the beginning may have changed. Be sure to tell your agent.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at http://www.moneymattersguam.wordpress.com.

Before buying a home, calculate what you can afford

This was originally published on Monday, January 11, 2016, in the Pacific Daily News.  Click here to subscribe to the PDN.

Buying the house of your dreams can sometimes be just that … a dream. But owning a house that lives up to your family’s needs, provides shelter and is a part of your life memories is very possible. The reality is what you can afford and what makes you financially comfortable.

Some experts say that your monthly home payments and other loan payments should not exceed 35 percent of your monthly income. Before you start looking at houses and shopping for a loan, determine how much you can afford. The hardest thing is to fall in love with a home and then find out you won’t be able to afford it. Knowing what you can afford first will make the process easier, since you will be looking at homes within your price range. Some people will go to a bank and get a pre-approved loan right away. Although banks are thorough with their financial research, you are the best person who knows exactly how your money is spent. The key is being honest with yourself when doing a budget.

Track your expenses for the next four months to the smallest details (entertainment, groceries, dining out, coffee, fuel, etc.). This may seem like an intimidating task, but it is an important step to knowing what you can afford. In other words, don’t just use what a bank or credit union uses in a mortgage pre-qualification worksheet as your guide to how much home you can afford. Don’t forget about all the other daily and monthly expenses. They add up quickly.

Income

Add up all of your income that you earn after taxes. Include your current pay stub, your spouse’s, retirement check, Social Security payments, alimony, and any other income you receive that can be used towards your mortgage.

Monthly expenses

List all the recurring monthly expenses that you pay and add them up, such as the power bill, water, trash removal, insurances, phone, car payments, credit card payments and other loans. Don’t forget to include property taxes, tuition for schooling and medications. Subtract this amount from your income. Do not include your rent or other fees you pay for your home since you are determining how much you can afford.

Other expenses

Next, add up the other expenses such as fuel, groceries, entertainment, eating out, and buying clothing. If you have a hobby such as gaming, bingo diving, add those costs up as well. These expenses may fluctuate over the month depending on how much you use them. That is why tracking four months of your expenses is needed. It gives you a realistic snapshot of your spending habits. Subtract this total from the total you recently calculated in the last step.

After expenses

What you have left is what you can afford for your monthly house payments. It is also wise to subtract an amount you want to put aside for home repairs and emergencies. When you own your home you can’t call the landlord to fix a problem. Those home repairs will be strictly your sole responsibility and out of pocket.

Now that you have an idea of what you can afford, you have worked on improving your credit score, and saved money for closing fees and that extra cushion, you can now go to a bank and inquire about a pre-approved loan. If your pre-approved loan is higher than what you calculated, stay on the safe side and look for a house less than what you are approved. The important thing is not to overextend yourself financially. You want the home to add value to you as an asset and not be a burden. The last thing you want to do is buy a home that could go into foreclosure, or worse, place you in bankruptcy.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at http://www.moneymattersguam.wordpress.com.

Things to consider when buying a house

This was originally published on Monday, January 4, 2016, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: My family and I finally saved up enough money to start looking into buying our first home. I have heard that the process can be long and somewhat confusing. What are our next steps?

Congratulations on saving that amount of money. That usually is the most challenging part of buying a home. I am not going to sugar coat it. The process can still be difficult, stressful, and exhausting but that should not be a deterrent to owning your dream home. Before looking and going through the process you should take a few things into consideration.

Credit Score. This is a topic I have mentioned many times in my articles because it is so important. Having a high credit score will save you a sizable amount of money especially when it comes to your home loan. Financial institutions see your credit score as a report of how responsible you are with money. Borrowers that are in the 580 to 600 range can expect to pay larger fees or a higher down payment. On the other hand, if your score is 700 and above you can expect lower interest rates and smaller monthly payments.

Know your credit score before applying for your loan. If you see any discrepancies, get them corrected as soon as possible. If your score is lower than 660, take some time to work on increasing your score. You may also want to hold off applying for new credit for at least a year before applying for a mortgage.

Savings. From your question you mentioned that you and your family had saved enough for a down payment. Did you take into consideration other fees and closing costs? A down payment on a home can be anywhere from 3% to 20% of a home’s selling price. Some programs such as Veterans Affair (VA) loan requires no down payment. Your bank may also have fees that your loan does not cover such as processing your loan or researching the title of the property. Other items that you may have to pay is the closing costs and title insurance, to name a few.

When applying for a loan, your financial records will be reviewed including credit card statements, bank statements and other loans that you currently have open. Financial institutions like to see that applicants have money saved up and that you do not live paycheck to paycheck.  Having a few months of a mortgage payments in your savings account will make you a better loan candidate.

Location. In retail they always say location is everything. The same holds true for purchasing your home. Know the area you want to live. Deciding where you want to purchase a home can give you an idea of how much your home will cost. Do you want to live close to shopping malls and night life or quiet and further away from the crowds? Take a look at the neighborhood. Do you want a closed gated community? Do people in the area seem friendly?   If your kids are in school will they have to move to a different school? Maybe moving will get you closer to a school you like. Commuting on Guam isn’t as bad as some areas, but you may want to take into consideration how long it takes you to get to work. Do you have to battle downtown traffic? Is the neighborhood in a high-crime area? Do you feel safe? Is it close to the beach, golf course, or have a beautiful view? Determining these factors can determine how much your home will cost.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Have mortgage questions ready

As you visit financial institutions about a home loan, it can help to have questions or topics ready to discuss. Such questions will help you learn about the best options for you, and will allow you to compare offers from different lenders side by side.

Which type of mortgage will be right for you? Typically, there are two major types of mortgages: fixed-rate mortgages and adjustable rate mortgages. The specific mortgage you choose will depend on your circumstances. If you plan on staying in your home for the long term, a fixed-rate mortgage may be the better option for you. You don’t risk a rise in interest rates throughout the fifteen or thirty years that you hold the mortgage and your payments will be predictable and straightforward.

With an adjustable rate mortgage (ARM), you can expect the interest rate to change throughout the life of the mortgage. One example of an ARM is a mortgage that starts with a low interest rate, which changes after the initial period of time passes. After that period, the ARM interest rate will be based on a standard financial index, up to a certain set limit, and your overall mortgage payment will change accordingly.

If you look into this option, pay close attention to the maximum interest rate you may pay, as well as the calendar dates where the interest rate will change. If there is a big change in the interest rate, your mortgage payments may suddenly rise, and you need to be sure that your budget can handle the increased payment. An ARM’s low initial interest rate may give you an advantage if you’re not planning on staying in your home for the long term, as long as you carefully consider your budget. Different mortgage types suit different purposes, so be sure to talk to lenders about the best option for you.

Compare interest rates with different lenders. Different financial institutions have different ways of calculating the interest rate they’re going to offer you. Some lenders may weigh certain factors more heavily than others, so there can be some variation in what you’re offered. A fraction of a percentage point can make an enormous difference in the amount you pay over a 30-year mortgage.

Will you pay points? Points allow you to reduce your interest rate. You pay a certain amount at closing (one point is calculated as one percent of your mortgage) in exchange for a reduction in your interest rate.

If you are offered points with you interest rate, talk to your loan officer about breaking down those numbers into the specific amounts you would pay at closing and on your mortgage payments. You can also find calculators online that will help you do this. Dollar amounts will help you compare offers from different financial institutions.

Compare closing costs. Different lenders may offer different closing costs, so it can help you to see estimated closing costs from various financial institutions before you make your final decision.

Closing costs include loan origination fees, application fees, appraisal and inspection fees, as well as other insurance and settlement costs. You can talk to lenders to develop a good understanding of each of these costs, and compare them as a factor in your decision.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 19 years experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com.

Prequalification can help you get a home

Shopping for home financing from different lenders can help you find a mortgage that’s right for you. To start getting to know a specific lender, you can ask for a pre-qualification.

Pre-Qualification

A pre-qualification meeting is an informal discussion with a lender about how much you qualify for in a mortgage. It doesn’t involve completing an application and should not involve any application fees.

Bring your financial documents with you as a reference point. To get started on an initial estimate, the mortgage loan officer will review your financial situation. Your past two years’ tax returns can give the mortgage officer a good sense of your income, especially if your income is cyclical or if you have sources of income other than employment. You can also bring along your most recent pay stub, a Verification of Employment, records of your current debts, and records of your assets—particularly the assets that you plan to use for a down payment and closing costs.

Ask about eligibility for special housing programs. This is a good time to find out whether the lender participates in a USDA or VA home loan program, or any other housing programs that they can recommend.

Be prepared to discuss your finances. In order to determine how much of a mortgage the lender will be willing to approve, the mortgage loan officer will need to understand your debt, assets, and income. For instance, he or she may ask you questions about the source of your assets, to ensure that your down payment is not actually an informal loan. (If you recently received a monetary gift for your down payment, you can bring along a letter from the contributor stating that it is a gift.) There may be questions about your debts, because your total debts are a factor in determining a sustainable mortgage amount to lend to you. These questions will help the lender arrive at a more accurate prequalification amount.

Ask for an estimate of fees, interest rates, points, and closing costs. It’s important to understand the various fees and costs involved in a mortgage, and a potential lender can answer your questions. Estimates can also help you compare lenders. We’ll discuss these topics further in next week’s column.

Consider the customer service you receive. Your mortgage loan officer will be with you through the closing process, which can be time-sensitive and demanding. You want to be sure that you are working with a loan officer who is attentive, responsive, efficient, and makes you feel comfortable with the mortgage process.

Submitting the Application.  Once you choose a lender, it’s time to submit a formal application. This will require more financial documents from you to verify your income, assets, debt, and employment history, along with application fees and a formal credit check.

When you submit a formal application, but haven’t started looking at homes with a real estate agent, you can request a pre-approval letter from the financial institution. This letter states the amount the financial institution is willing to lend to you, as long as the appraisal on the future home meets the lender’s requirements, and other lender conditions are fulfilled.

If the lender approves your application and provides a letter for you, you can use this as a negotiating tool when you look at homes. Because you have taken the step of having an application approved, your real estate agent and sellers can have more confidence in your purchasing power, and be more willing work with you to reach a deal for a home sale.

There will be more to expect during the closing process, but at this point you are well on your way.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 19 years experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com

Figuring out the home you can afford

How much can you afford to pay each month for your future home?

This question helps you make a sustainable decision about how much to borrow as you start your housing search. Your mortgage may be with you for as long as thirty years, and protecting your credit means making those payments on time, consistently, throughout the life of the loan. In addition to your mortgage payments, you will also have maintenance and utilities costs. Factoring those costs in early can protect you from financial problems down the road.

To start answering this question, let’s take a look at your budget.

Update your budget.  You need a good, realistic starting point as you study your own financial behavior. Costs change, and financial habits change too. If you haven’t updated your budget in a while, now is the time.

Pay close attention to how your family’s spending habits have changed, or are expected to change in the near future. Are you spending more of your discretionary income than you realized? Sort your recent spending into different categories, so that you can determine which spending areas are growing, and which need to be cut down.

Take a look at your other goals. Which financial goals, besides home ownership, are you currently prioritizing? Do you still have room for them in your budget? Does home ownership come first at this point in your life? When you are clear on your choices, you can move forward on your home purchase with greater confidence.

Add or subtract goals from your family budget as you and your spouse see fit. What you have remaining in your budget, added to your current rental/housing costs, is what is available for your future home.

Plan for maintenance and utilities costs. Do you think that your power and water usage will drastically change once you move into your home? Will you be moving from a smaller housing situation to a larger one?  Talk to family members and friends who are homeowners, and ask them about their usage and costs for utilities and maintenance. Try to use the numbers from people who have a similar family size and habits, and figure them into your budget.

Remember property taxes and insurance. Monthly mortgage payments include not only the principal and the interest of the mortgage, but also property taxes and homeowner’s insurance. These costs will depend on the value of the home. It’s something to keep in mind as you look at the monthly funds available in your budget.

Adjusting your spending habits. If you know that you want more room in your budget for your future home, it’s time to review your spending habits. Look back at those categories, and start making small cuts to different categories in your discretionary spending. Target areas of your spending, and think about alternatives to those costs. Take some time to become acclimated to a new spending level, so that you don’t fall back on old habits when the mortgage payments come due.

Many factors determine the amount you can ultimately borrow: the quality of your credit, the amount of debt you have, your savings, and your gross income. But a firm understanding of your own household budget will provide you with an important starting point in talking to lenders about your home-buying dreams.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 19 years experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com.