In this section, we will be discussing what happens when we get to the point of making an offer on a particular property.
Q: We have a client that would like to make an offer on a property. Where should they begin?
A: It is a wise idea for the buyers’ agent to give me a call and discuss any potential issues with the property itself. When they write the offer, that is when we will want to talk about any specific property concerns and have a plan on how to meet those challenges. We will also want to talk about loan to value, purchase price, downpayment, and things of that nature. Is the seller going to give back any closing costs? Not that that happens right now but I suspect it will come back. Specifically, because the buyer agency is starting to gain speed where buyers are being asked to pay commissions because of the change where there is not a 50/50 split anymore. I am seeing buyer agency commissions becoming a thing. If that continues to happen, we have to source that money, which means the buyers’ have to bring more money to the table, and buyers are already stretched. I foresee sellers will have to dip Ito their pockets and begin to pay some closing costs.
Q: Are there guidelines as to what a buyer can ask the seller to bring to the table in the way of closing costs?
A: Yes, specific programs have limitations as to how much a seller can give for closing costs. FHA and USDA are 6%, conventional is 3% depending on the downpayment. There are very specific limitations on the amount a seller can pay and it is specific to the actual cost. If the seller says they will give you 6% but the total closing costs are only 4.5%, the seller gets the benefit of 1.5%. It is not a simple calculation, we would have to talk about that.
The appraiser will determine the value “as is” or “subject to.” As is, meaning the property is good to go with no repairs. Subject to, meaning that the property is a certain value with specific conduits or repairs. The appraiser will outline specifically what needs to be done and we as the lender have to do that in order for this property to close.
Q: If the appraiser indicates that the home needs certain repairs and the seller is not willing to do the repairs, what happens?
A: If the buyer is willing to do the work, they would have to get the work done prior to closing if weather permits, or the money would have to be escrowed for the work to be done at a later date. Also, if there was quite a bit of work that needed to be done, we could also flip it to a renovation loan. We usually have options to make it work. You are also going to want to talk about commitment time, how long is it taking your underwriters to get those commitments out? What are you thinking about for the closing date, are your appraisers really slow right now? Do you think it will be a 45-day close or a 60-day close? Does it need to be a 30 day?
If we had done a committed preapproval then a 30 day would be reasonable. I have had situations where buyers have gotten a preapproval, went out and found a house and gone under contract and then said to me, “Hey, work your magic.” However, they are $20K over what I had said they could go. Then we have to go back and see what we can do. It is always better to talk to the lender while you are writing the contract.
Q: Is an inspection required?
A: No, the only inspection required is a termite inspection for Va, and the buyer can not pay for it. A water test is required for USDA and any programs that are NH Housing.
Q: Do they need a water test if it is city or town water?
A: No, if it is city or town water, they do not need a test. If it is a community water system we would need the most recent testing or state report.
Q: Since you don’t require a general building inspection, the buyer can say they are waiving the general building inspection. Is that correct?
A: This is happening quite a bit in our current housing market. People are either waiving having a general building inspection or having one but not having it contingent on the purchase. Recently we had a deal that fell apart. The customer called me over the weekend and said he had to talk to me. He proceeds to tell me that the inspection is really bad. There are structural issues. He went on to tell me he waived the home inspection contingency. I explained that this is a problem, we were talking about $150K of repairs on a $250K home. The buyer was distraught, what now? I explained that I can’t get involved in that and unfortunately if the appraiser doesn’t note these items, and if it comes in on price, you, you are on the hook, it comes in just one dollar lower, you can get out of the deal.
Q: And now you know about the issues because the buyer told you. What now?
A: Yes, now I know about it and I can’t un-hear it. My biggest concern about this whole situation is that now you told me, we will probably require you to do all the work and if the seller isn’t willing to budge, you will be into this thing for $400K. My recommendation is to talk to your agent, go back to the seller and see what you can do. This is way above a regular home inspection, let’s talk about this.
In our current market, waiving a home inspection is common and scary. It is a huge gamble and this is where you get caught. I had to say to him, look everyone is doing it, it is not uncommon, it isn’t an agent issue, she/he did nothing wrong. Hopefully, you knew what you were signing. He said he did, but now he wished he didn’t do that. At the end of the day, when you gamble sometimes things happen, and unfortunately, it is happening. Again, it falls to the appraiser, however, when the buyer tells me something that is wrong, I have to address it.
Last year, I had a borrower say the septic system is insufficient for us. I asked if it is broken or is it insufficient for you? He said, they only have two people, we have five. I explained that is different than not working. There was nothing wrong with it but it would work for them. In that scenario, I do not have to address it because nothing is wrong with it and it is totally functional.
Q: Quite often as I am talking with clients that have just gone under contract to buy a home. They are very excited and say they are going to go out and order new furniture, lawnmower, patio furniture, etc. What should I tell them?
A: Tell them no! We really don’t want them to do that. There are a couple of reasons for that answer. We are talking about a first-time homebuyer that is probably at the very top end of their approval number. Any new credit could put them out of being able to qualify for that house. At the end of the day. We will find out if they applied for anything. We recently had a customer apply to increase a limit on his credit card. We get notification of that. You aren’t going to hide it, it will not go unseen. So, we now need to find out if that increased line of credit was approved and also look at what that payment would look like along with rerunning the debt to income ratio. If you are someone who has a lot of room in their approval it will probably to going to be a problem but I would still need to rerun the numbers to make sure they are still qualified. The sooner they tell us about anything like this, the better. If we find out a day or so before closing it will delay closing. In this market, if you don’t close on time, the seller will gladly sell to someone else. If you are an agent working with a buyer and they tell you they are going to quit their job tomorrow, counsel them not to do that and call their lender first. If they quit their job, we don’t have a deal, if they buy that new motorcycle, we don’t have a deal, if they buy that new furniture, we also don’t have a deal. It is really important to stay in communication with any purchases or career changes they are thinking of doing.
Q: How about the different costs associated with the lending companies?
A: There is the application fee, and for us, it is $150.00 and that is collected at the time the appraisal fee is collected. There is the Origination Fee, which is the only money that goes to the lender for issuing the loan. That fee is the cost of processing, documentation, and my staff.
As soon as we drop the address in the application, that becomes a live application, which means we have a full application and it also means that the clock starts. On our side, there are very specific dates we have to hit. If the buyers don’t get information into us on time we can actually be fined up to $1000K per day, which is called an Equal Opportunity Act Violation. When I say to buyers, I need that bank statement, that is why. We also really want to stay on track for closing. What I would like people to understand is that when we ask for certain documents, it is not me asking, it is the Federal Government. Every document that comes in, we have to review and verify. It takes time.
Q: Can you explain what is a letter of explanation and why do you sometimes ask for one?
A: A letter of explanation is a document that basically says there is something in your scenario that the underwriter is going to ask about. Let’s put pen to paper and explain what it is so it doesn’t hold up the process. An example is a significant gap in employment. The underwriter will want to know why. It could also be a change of name or an address that shows up on a credit report and it is not on the application within the previous 2 years.
Q: What about if the buyer is getting any of the funds as a gift, possibly from parents? Do you need any documentation?
A: Yes, we will need 2 months of bank statements from the person giving the gift and we need a gift letter specific on your form.
Q: What if the person giving the money doesn’t want to do that, they say no, it is none of the bank’s business.
A: Then the money is not usable for the transaction And that can be a big problem. You have to source the funds. This is done because of money laundering issues. If someone puts a large sum of homey in the bank and plans on using it for the downpayment, you can’t use it for that purpose for 60 days. And a letter of explanation would also be needed. If parents want to give their kids money for a home, they should think about it way ahead of time. It is easier to get the money before starting the home search. Don’t wait till you find a house. It may take you 3 months to find a house and if they don’t want to supply the bank statements, get the money in your account now.
That covers first-time buyers, the closing process, and what is needed. In Part 3 we will discuss Title Companies, what they do and where they fit into the home buying process.