Buying a Second Home in Seven Steps

Thinking about buying a second home? Whether you're looking for an investment property, a getaway, or a place to eventually retire, plan to take these seven important steps.

One: Decide Whether a Second Home Makes Financial Sense

Whether or not you consider yourself an investor, you no doubt want your second house purchase to be a sound financial move. Yet many second-home owners complain that the house -- including not just the purchase price, but ongoing expenses -- ended up costing more than they'd ever imagined. You'll want to tally up your likely expenses, factoring in any extra costs based on the fact that you won't be there every day (such as hiring a management company and the relatively high cost of hazard insurance). Then you'll need to build up your cash reserve, and, if you plan on renting out the property, determine how much you can expect from rental income (it's often not enough to cover your monthly costs).

Two: Decide Where, and What Type of Home You'll Buy

A home in a badly chosen location won't serve anyone's goals -- an investor can't resell or rent it, a vacationer won't enjoy it, and a future retiree may have to pick up and move again. You'll need to rely on both market research and your own personal preferences. Look into factors like the strength of the local economy, trends in house resale values, convenience and amenities, property tax rates, the quality of local schools and medical care, and more.

The type of home you buy is similarly important. The costs and demands of owning a single-family home are different from those of owning a condominium, townhouse, or co-op. Which type serves you best will depend on factors such as cost, location, and upkeep. For example, condos, townhouses, and co-ops typically require less maintenance, since the areas of the property outside your unit are governed and maintained by a community association (of which you'll be a member). However, you'll pay for that maintenance in the form of monthly fees and special assessments.

Three: Look into the Tax Implications

Second-home owners need to worry about both property taxes (which vary by state and locality) and, if renting out the place, income tax. Though taxes are inevitably a burden, a little advance planning during the house-hunting process can save you thousands of dollars a year. For example, sometimes buying a home just over a town's border can significantly trim your annual property tax bill. And if you're renting out a vacation property, the amount of days you yourself spend there can make a difference in how much you'll owe in income tax.

Four: Come up With Short-Term Cash and Long-Term Financing

Most people pay for their home with a combination of a down payment and a loan for the remaining amount. The higher your down payment, the lower the loan, and the more house you can therefore afford. In order to come up with down payment cash (which should be at least 20% of the purchase price), you may need to get creative. Using the equity in your primary home, borrowing against a life insurance policy, or refinancing your car are among the possibilities.

Most buyers will also need to get a home loan to help with the rest of the financing. Shop around: By reviewing the various mortgage options and sample payment schedules and factoring in your own short- and long-term goals, you should be able to find a mortgage that suits you.

Five: Consider Nontraditional Financing Methods

One unique way to help finance your second home is to tap the "Bank of Family and Friends." Borrowing from parents, siblings, or close friends lets you keep the tens of thousands of dollars in interest you'll pay over the life of your mortgage loan within your circle, rather than handing it over to a bank.

Another money-saving approach is to partner with another purchaser; for example; sharing a vacation home in the sun. Shared ownership is a growing trend -- but not one to rush into lightly. You'll want to start by determining whether co-ownership with a particular person is likely to work. Then draft a written agreement to spell out how ongoing costs will be split and deal with other potential sources of contention, such as what happens if one of you wants out after a few years or if one of you dies.

Six: If You'll Be a Landlord, Be Prepared

Some second-home owners plan to rent out their properties long-term with the idea of eventually turning a profit (rental properties usually take some years to make money). Others just want to rent out their property periodically as a means to offset expenses. Either way, you're taking on the role of a landlord, which means more than just following your instincts. Finding good tenants or trustworthy vacation renters, understanding and preparing leases or short-term agreements, and dealing with ongoing management and repairs are just a few of the practical and legal issues involved. Also, the obligations of managing a long-term rental are quite different from those of a periodic rental.

For more on becoming a landlord, see First-Time Landlord; Renting Out a Single-Family Home, by Janet Portman, Marcia Stewart, and Michael Molinski.

Seven: Take Steps to Protect Your Second Home

Protecting your property starts before you buy and continues long afterwards. For example, you'll want to get a proper home inspection prior to purchasing, so as to deal with some repair issues up front and get a sense of what other repairs may be looming.

You may need to purchase title insurance -- typically required by the lender -- in case problems such as past ownership or debt claims on the property surface after the purchase.

Your lender will also require that you carry hazard insurance, to protect your property against damage from such causes as theft, fire, flooding, or windstorms. The cost of insurance for second homes is usually higher than for first homes, since you won't be there as much. You will probably want to add liability insurance, covering you and members of your household for accidental injuries to your visitors. (Together, hazard plus liability insurance add up to the standard homeowners' insurance package.) Taking these protective steps will guard not only your home, but your peace of mind.

Shared from:  http://www.nolo.com/legal-encyclopedia/buying-second-home-seven-steps-30010.html

VA Appraisal vs. Home Inspection

The VA appraisal is a crucial part of the home-buying process for qualified veterans & service members.  VA appraisals focus on valuation & a more broad-based check of property conditions that could affect health, safety, or marketability.

Every VA buyer needs to clear the appraisal hurdle.  But understand that an appraisal is not a home inspection.  To be sure, you're required to get only the former.  But buyers should invest in peace of mind & also spring for a home inspection - in many cases before moving forward with the mandatory appraisal.

Home Inspection

A home inspection might set you back $300 or $500, but it's well worth the money.  The VA appraisal is more like a 100-foot view of the property.  Home inspectors will dig into the nooks & crannies & take a much more exhaustive approach.

If problems arise, buyers can typically use the inspection findings to renegotiate with the seller or even walk away from the deal with their earnest money.

Once you're under contract, your lending team will move toward ordering the VA appraisal.  But many buyers start with a home inspection before deciding whether to spending an additional $400 or so on the appraisal.

The VA Appraisal

VA appraisals can get a bad rap.  But they're meant to safeguard VA buyers & their investment.  The Veterans Affairs' independent appraisal process has helped make these $0 down loans some of the safest on the market.

The first purpose of the VA Appraisal is to assess a home's fair market value.  Appraisers will look at recent comparable home sales, or comps.  After submitting at least one good comp with valuation & supporting documentation, the lender's staff appraisal reviewer will essentially double-check the assessment & issue a formal notice of value for the property.

The appraiser will also look to see if the home meets the VA's minimum property requirements.

MPRs ensure a property is up to par with health & safety standards & can vary by location.  Broadly, the VA wants to make sure buyers are getting homes that are safe, sanitary, & structurally sound.

Lenders can have their own property-related requirements in addition to the VA's standards.  Properties with income-producing attributes, for example, can be a tough sell for some VA lenders.

When it comes time to evaluate a potential purchase, both a home inspection & VA appraisal are key to ensure the property in question is a good fit for you & your family.





Shared from:  http://www.realtor.com/advice/va-appraisal-vs-home-inspection/

Getting Married? Skip the Fancy Plates and Ask for a Down Payment Instead!

They already have the high-powered blender, the 800-thread-count sheets, and the stemless wineglasses. And while they could always register for even more kitchen gadgetry and overstuffed throw pillows, some modern couples have their eyes on a different kind of wedding gift. What many of them want more than anything else is a house—or, more specifically (and reasonably), the down payment that will unlock the front door.

A growing number of altar-bound lovebirds are rethinking the traditional retail-based wedding registry (or registries, in many cases). Some are nudging their wedding guests toward online crowdfunding-style registries, designed to accept contributions to a couple’s down payment goals. Others are quietly suggesting “money for the house” when asked about their preferred present. Either way, plenty of couples are reconsidering altogether this gift-receiving opportunity in light of what they truly need.

A range of factors is at play here, the most obvious of which is the higher average marrying age—27 and 29 for women and men, respectively—than in past generations. It’s hardly a secret that many 20- and 30-somethings are temporarily sidestepping marriage while they establish careers, travel the world, hit up trivia night guilt-free, and, well, search for the right someone to marry.

Then again, even some younger couples seem to think that receiving a mountain of swanky home accessories before owning a home is putting the cart before the horse. After all, you can’t feather a nest if you don’t have a nest to begin with.

Twenty-five-year-old Daniel Barros and his fiancée, Traci Whiting, 24, of Plano, TX, are getting married in October. When they started thinking about setting up a gift registry, they were struck by the reality of their living situation.

“We live in an 800-square-foot apartment,” Barros said. “Even if we wanted a bunch of wedding presents, we wouldn’t have anywhere to put them. Getting that down payment together is our top priority, and we’re grateful for any amount our friends and family are willing to give to make that happen.”

To help achieve their goal of $5,500, Barros and Whiting set up a registry atFeatherTheNest.com, a Florida-based crowdfunding site that allows “nesters” to register for anything from contributions toward a down payment to funds for home improvement projects. Beth Butler, principal at the site, says crowdfunded registries offer couples a way to involve their friends and family in the most important purchase they’ll ever make.

“When you’re choosing a gift from a traditional retail registry, you’re pretty much bound to the prices of the items the couple has chosen, and even then, you’re likely giving them something they may forget about at some point in their marriage,” Butler said. “But helping a couple get into their first home, that’s a contribution they won’t ever forget.”

Butler said that her site, which launched in May 2014, now sees 15 to 20 “nests” (as each fund is called) per month.

Other similarly functioning sites—such as HatchMyHouse.com andDownPaymentDreams.com—offer comparable services, typically for the cost of a small percentage of the couple’s gift total.

Rieve MacEwen, president and co-founder of Hatch My House, estimates that the monetary value of the average U.S. wedding registry hovers between $8,000 and $8,500—an amount that, if applied to a down payment (generally at least 20% of a home’s price), could certainly give a significant boost to a couple’s savings efforts.

But not everyone is so enthusiastic. Teresa Krebs, who started Down Payment Dreams in 2009 and has since hosted some 800 registries, said that a handful of users have reported a lukewarm response from family members, some of whom felt that asking for money was tacky. But, as Krebs points out, “a registry is just a suggestion, and a down payment registry is no different. It’s a couple’s way of saying, ‘We’d like your presence at the wedding, and if you choose to bring a gift, this is what would be most helpful to us.’”

Just how helpful? When Sally and Yann Sauvignon married in 2010, they set up a registry at Hatch My House, along with two traditional retail registries. About a year after their 200-guest wedding, the couple was able to use their down payment gifts to cover the closing costs on their new home in the San Francisco Bay Area.

“We weren’t quite sure how it would be received, but I think about a third of our gifts were given through the Hatch My House site,” Sally Sauvignon said. “It was a really neat way to connect our friends and families to a goal that was really important to us.”

To be sure, the concept of a down payment as a wedding gift is still a bit of an outlier. The majority of engaged couples are still filling their conventional registries with flatware and “good” china. But MacEwen—who says Hatch My House has hosted roughly 2,600 registries since its founding in 2009—is confident that the next decade will see a more pronounced shift in the wedding gift tradition altogether.

“What will really change the way people use gift registries is when they look beyond the idea of purchasing an item, and decide they want to be a part of someone’s overall life experience instead,” MacEwen said. “Buying a home and getting married are two of life’s biggest events. Over time, I think people will realize that it makes a lot of sense to connect the two.”

How to crowdfund your dream home

Don’t be sheepish. Wedding registries of any variety are simply a series of gift ideas for wedding guests who are already planning to buy a present. A down payment registry is no different—it’s just a suggestion.

Spread the word. Share the specifics of your down payment registry on your wedding website, on any wedding shower invitations, and when friends and family ask where you’re registered.

Be grateful. In addition to the thank-you notes that you’ll send promptly after the wedding, consider sharing periodic updates about your home-buying adventures with the people who helped make it possible. It’s just another way to show your gratitude.

Leave a paper trail. When applying for a home loan, you’ll need to verify that your down payment is yours, free and clear, and not the result of another loan. Most down payment crowdfunding sites will  document the nature of the monetary gift.

Shared from:  http://www.realtor.com/advice/down-payment-wedding-registry/

New FHA Loan Rules

Federal Housing Administration loans look like a godsend right now. The FHA requires a down payment of only 3.5%, and it just lowered its mortgage insurance premiums by 0.5%. (You have to get mortgage insurance when your down payment is less than 20%.) It’s doing all this to attract more home buyers—especially first-timers—to the market.

Before you hop on the government loan bandwagon, know this: FHA loans aren’t for everyone. There are several things you should consider before applying for one. 

Limited loan amounts and types

FHA loans can be quite modest. In most areas, the limit is $417,000. In certain high-cost areas, the limit is $625,000. Depending on where you live, that might not get you the spacious house you’ve been dreaming about.

Credit requirements

To take advantage of the FHA’s low 3.5% down payment, you’ll need a credit score of at least 580. The official minimum for an FHA loan is 500, although borrowers with a score below 580 will need to fork over a 10% down payment.

While you’ll have an easier time getting an FHA loan with a low credit score, it usually means higher interest rates. But since the FHA backs these loans, you’ll get better rates with a poor score than you would with a conventional mortgage. However, it’s often just better to wait and boost your score instead of paying thousands more over the life of the loan.

Some lenders won’t lend to those with scores below a certain threshold, like 620. Others might change their requirements to adhere to a changing market, which is what Wells Fargo recently did when it lowered its FHA credit requirements from 640 to 600.

A life sentence of mortgage insurance

FHA borrowers are required to pay an upfront mortgage insurance premium (MIP). Currently, the fee is 1.75%. This fee is usually rolled into the total cost of the mortgage.

Additionally, FHA borrowers have to pay annual mortgage insurance. For most loans, this mortgage insurance remains throughout the life of the loan—you will need to refinance out of an FHA loan to get rid of it. In contrast, you can stop paying mortgage insurance on conventional loans after acquiring 20% equity. In January 2015, the FHA reduced its annual MIP rates to 0.85%.

Remember: The MIP rate you get at the time of your loan is the one you’re stuck with unless you refinance. If you had closed on a mortgage in December 2014 with MIP rates at 1.35%, your premiums would stay the same in January 2015 despite the reduction.

Fewer lenders

While many lenders are FHA-approved, not all are. This means you may have a smaller selection when it comes to finding an FHA-approved lender in your area. However, you should not have too difficult a time finding at least two to compare.

Stricter appraisal requirements

FHA appraisal guidelines are more rigid than those for conventional loans, and not all houses will get the green light for FHA approval. Usually this means the home needs some kind of repairs. If the seller isn’t willing to make them, then there’s no FHA loan for that property in your future.

Don’t limit your choice

If your credit is good and your payment history is solid, you should first look into a nongovernment-backed loan, if only for comparison. Many loans not backed by the FHA have more flexible terms, and lenders have a wider variety of options when they don’t have to adhere to certain government rules.

Reposted from:  http://www.realtor.com/advice/new-rules-make-fha-loans-look-tempting-theyre-not-everyone/

10 Home-Buying Costs You Need to Know About

If you’re a first-time home buyer, you might get a little queasy when the last line of your good-faith estimate comes in at several thousand dollars. And after the color returns to your face, you might also be a little more than perplexed by some of those fees.

Knowing what you’re paying for—like these 10 common costs—can ease that check-writing pain.

1. Earnest money

To prove you’re “earnest” in your purchase commitment, expect to plunk down 1% to 2% of the total purchase price as an earnest money deposit. This amount can change depending on market factors. If demand in your area is high, a seller could expect a larger deposit. If the market is cold, a seller could be happy with less than 1%.

Other governing factors like state limitations and rules can cap how much earnest money a seller can ask for.

2. Escrow account

An escrow account is basically a way for your mortgage company to make sure you have enough money to cover related taxes and mortgage insurance. The amount you need to pay varies by location, lender, and loan type. It could cover costs for a few months to a year.

Escrow accounts are common for loans with less than a 20% down payment and mandatory for FHA loans, but it’s not required for VA loans.

3. Origination

The origination fee is a hefty one. It’s the price you pay the loan officer or broker for completing the loan, and it includes underwriting, originating, and processing costs.

The origination fee is a small percentage of the total loan. A typical origination fee is about 1%, but it can vary. Use your good-faith estimate to shop around.

4. Inspection

You want to be assured your new home is structurally sound and free of surprises such as leaks or pests living in the walls. Those assurances come with a price.

• Home inspection: This is critical for home buyers. A good inspector will be able to notify you of structural problems, flooding issues, and other potentially serious problems. Expect to pay $300 to $500 for a home inspection, although cost varies by location.

• Radon inspection: An EPA-recommended step, this inspection will determine whether your prospective home has elevated levels of the cancer-causing agent radon. A professional radon inspection can cost several hundred dollars.

• Pest inspections: Roaches are one thing. Termites are a whole different story. Expect to pay up to $150 for a termite inspection.

5. Attorney

Some states, such as Georgia, require an attorney to be present at closing. In some other areas, this is optional. If you use a lawyer, expect to cover the costs, which vary by area and lawyer.

It’s typical for mortgage companies to have a lawyer on their end, although they should cover the bill.

6. Credit check

Just because you can get your credit report for free doesn’t mean your lender can (and it will actually pull all three). You have to reimburse the lender, usually around $30.

7. Extra insurance

If you live in a hazard-prone area, you might need to purchase extra insurance, like forflood.

8. Appraisal

Your lender won’t loan you money for a home without knowing what its fair market value is. An appraisal will cost $200 to $400, depending on location and property size.

9. Title company

You pay this to the title company to make sure the property’s title is free and clear. Your lender will recommend a title company, but you can also shop around for one.

10. Survey

It’s not required in all instances, but your lender may require a professional surveyor to determine exactly where your property lines are drawn. Prices vary widely, but expect to pay at least $100.

Remember: You have bargaining power. Shop around to get a feel for what rates and fees apply in your area. If you aren’t sure what a lender is charging, ask for an explanation—the charge might not be set in stone. If you’re unhappy with a charge, negotiate.

Reposted from:  http://www.realtor.com/advice/10-home-buying-costs-need-know/

Preparing Your Credit to Buy a Home

As the housing market heats up in 2013 and more consumers consider buying a home, it’s important to consider the role that your credit score plays in your ability to secure a mortgage. Conventional mortgage lenders will typically want a FICO score of at least 720, or in some cases 740, but those with a score below 700 may still qualify for an FHA loan.

With that in mind, here’s a look at the steps you should take to prepare your credit before applying for a mortgage.

1. Review your credit report.

Several months before you plan to get a mortgage, check your credit report for any issues. If you generally pay your bills on time, then check your credit two to three months in advance just in case you need to correct any mistakes, says Carolyn Warren, author ofMortgage Rip-Offs and Money Savers and Homebuyers Beware. For those who know they have late payments or other derogatory items on their account, Warren suggests starting six to nine months in advance to clear up those issues.

2. Dispute any inaccuracies.

If your credit report contains errors—for instance, there’s an unpaid item that you’ve actually paid or an account showing up that isn’t yours—you’ll want to file a dispute with the credit reporting agency. A report from the FTC earlier this year shows that roughly a quarter of the reports examined by the commission contained at least one “potentially material” error.

3. Make sure you have several tradelines.

Conventional loans require at least three tradelines (any combination of credit cards, student loans, car loans, and so on) that have been active within the past 12-24 months. FHA loans require two tradelines. It’s fine to have more, but if you have fewer, you won’t qualify for a mortgage. If you need to open additional tradelines, Warren suggests getting a major credit card like a Visa or a Mastercard (not a store credit card) at least six months before you apply for a mortgage and using it for items you would buy anyway. “Never charge more than 30 percent of your allowed limit, and pay it off in full every time you get your bill,” she adds.

4. Leave older credit lines open.

Older, more “seasoned” tradelines help boost your credit score, so leave those credit cards open even if you don’t use them all the time. “A lot of people think, ‘I’ve got six credit cards, I’m going to close the four that I don’t use,’” says Warren. “But that’s a big mistake because your good accounts are adding positive points to your score.” Try to use those credit cards every few months and pay the balance in full so those tradelines remain active.

5. Avoid opening new credit lines.

Once you’re six months away from applying for a mortgage, stop opening new credit lines, as this can temporarily lower your score. “The credit bureau doesn’t know how you’re going to handle that new credit, so because there’s that uncertainty, it’s a risk factor,” says Warren. “Lowering your credit score is not worth that 10 percent discount you’d get from a department store for opening a new credit card.”

6. Stop buying on credit.

In the excitement of buying a house, some people rush out to charge new appliances or furniture before closing. But even if you’re in escrow, having a debt utilization ratio above 30 percent right before closing could disqualify your loan. “Unless you’re gonna pay cash, have patience for your new furniture until after your loan is closed,” says Warren. Also hold off on getting a car loan, as car financing tends to be more lenient than mortgage criteria.

7. Don’t shuffle money around.

When you apply for a mortgage, you’ll need to provide several months of bank statements for your checking and savings accounts. “If you suddenly shut an account or have a large transfer from one account to another, then you’re going to have to paper-trail that whole account too,” says Warren. “Leave your money and your accounts the same for at least three months. It won’t disqualify you but will make a paperwork hassle.”

Reposted from:  http://www.creditsesame.com/blog/how-to-prepare-credit-buy-a-home/

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