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The Benefits of Being a First-Time Homebuyer

There’s no time like the present

Everyone agrees, buying your first home can be an intimidating experience! There are numerous things to take into consideration, from finding the right house to financing. “What the heck is PMI?”  But, being a first-time homebuyer comes with some advantages, too!

First-time homebuyers often have access to special loan programs that can assist them in getting into a home more quickly and less expensively than those who have purchased homes previously. These programs offer first-time buyers benefits such as low down payments, subsidized interest, and a limit to the fees that a lender may charge them.

Lenders usually expect homebuyers to pay a down payment of as much as 20%, which can be prohibitive for those who are trying to purchase their first home. But first-time homebuyer loans often offer a reduced down payment of anywhere from zero to 3.5% of the sale price. A down payment that low makes buying a first home much more accessible.

First-time homebuyer loans may also feature a limit on the fees that the lender charges. Like the reduced down payments, this is made possible by government mortgage insurance available to new homeowners. HUD insures your mortgage for an annual premium, reducing the risk to the lender. This results in the ability to charge lower fees and down payments while remaining profitable.

Low-income first-time homebuyers may qualify for subsidized interest programs. This means that a third party pays the interest on your loan. These programs can make your mortgage payments more affordable and enable you to pay off the mortgage more quickly. While the government is one of the most frequent subsidizers of loans, they can also be subsidized by charities, organizations, or even individuals.

First-time homebuyer programs are generally available only to people who are going to live in the home they purchase as their primary residence. The home will also have to be in good condition with no safety hazards present. And due to the fact that these programs are designed for those in need, there is a limit on the value of the homes you can purchase through these programs.

First-time homebuyers can take advantage of numerous programs to assist them in owning their first home. From lowered down payments to subsidized interest, first-time homeownership has become much more affordable. It’s important that you find a qualified mortgage lender to help you navigate this process. Contact me if you need a referral!

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What are the Contingencies in a Missouri Real Estate Contract?

I’ll say it: real estate transactions are complicated. You’re signing a million forms, splaying open your finances, coordinating your move (sometimes cross-country), talking to Realtors, lenders, inspectors, and title companies. There are countless moving parts and it’s imperative that your Realtor keep everything on track and, more importantly, on deadline. Contingencies are milestones set forth in the contract that allows a buyer to back out if certain conditions aren’t met in a timely fashion. These are mechanisms that protect the interests of both the buyer and the seller, preventing an instance where perhaps you get all the way to the closing table just to learn that the buyer can’t obtain financing to purchase the house. While several possible contingencies can be added, there are four main contingencies that come standard in a Missouri real estate contract.

  1. Title Contingency
  • At closing, the seller must transfer to the buyer “marketable title” to the property via a deed. Marketable title means that the ownership of the property is free and clear of any clouds, such as liens or other potential claims of ownership. Once you are under contract, a title company will conduct an examination of the title in order to issue a title insurance policy. If the title company discovers any clouds or defects on the title, this contingency allows the buyer to object to these conditions. The buyer may request that the seller clear up the issue prior to closing, or if they wish, the buyer may simply back out of the contract with their earnest money returned.
  1. Inspection Contingency
  • When a contract falls apart, home inspections are often the culprit. The contract allows a buyer to obtain professional inspections of the property in order to gain a better understanding of the home they are purchasing. If the inspections uncover any issues that are unacceptable to the buyer, the inspection contingency gives the buyer a couple of options. First, the buyer can choose to back out of the contract with their earnest money returned, though they still must pay for the cost of the inspection(s). Or, the buyer can request that the seller fix the issue. This opens up a negotiation window allowing the parties to go back and forth about what and how the seller will fix the problem, either through repairs or sometimes a closing cost credit or price reduction in lieu of repairs. If the parties can’t reach an agreement within the specified time period, the buyer may back out of the contract with their earnest money returned.
  1. Financing Contingency
  • The buyer is likely already pre-approved for a mortgage at the time their offer is written, but the real work begins once the contract is finalized. The buyer’s lender will get to work on securing the loan, which can include a formal loan application, credit report, appraisal (more on this later), pay stubs, tax returns, and more! If the lender discovers something that will prevent the buyer from obtaining a loan at the contracted purchase price, the financing contingency allows the buyer to terminate the contract with their earnest money returned.
  1. Appraisal Contingency
  • Though the buyer’s loan may depend on an appraisal, it is a separate contingency. In most cases, the buyer’s lender will require a formal appraisal to ensure that the property is worth the amount that it is being purchased for. If the appraisal reveals that the home is worth less than the contracted purchase price, the lender will only loan the buyer the appraised amount. Enter: appraisal contingency. In this scenario, the buyer has three options: terminate the contract with their earnest money returned, make up the difference between the appraised and contract prices in cash, or ask the seller to reduce the purchase price to the appraised amount. The buyer and seller can negotiate on the purchase price and if they fail to reach an agreement, the buyer may back out of the contract.

All of these contingencies are important safety tools in a real estate transaction, but they only exist within a timeframe. If a buyer slips up and misses a contingency deadline, they could forfeit their earnest money or worse: end up in litigation. Make sure you enlist a trusted, experienced Realtor to keep the transaction on track and get to the closing table on time.

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Thinking of Buying an Income Property in Columbia, Missouri?

There are tax consequences for that little cash cow

Real estate has always been, and will continue to be, one of the very best long-term investments you can make. By definition, an investment property is real estate purchased with the intention of earning a return on the investment, either through rental income, future resale, or both. An income property is a non-owner-occupied investment property (commercial or residential) bought for the purpose of generating passive income through rental activity.

A smart investment. Passive income. Sign me up, right?

Yes! But…

Before you start shopping for that little cash cow, you’ll need to educate yourself. Only then will you be able to decide if owning income property is a good fit for you.

  • Although many factors influence whether or not a particular property is a good ‘income investment,’ those that meet the “One Percent Rule” deserve a closer look. The rule simply states that one month’s rent should equal one percent or more of the purchase price (after any necessary repairs or improvements).
  • Generally speaking, you should limit your search to existing rental properties. This will enable you to verify rental history, vacancy rate, and operating costs before you buy. Also, check to make sure there is a current Certificate of Compliance on file (required by many municipalities, including the City of Columbia).
  • If you lack the cash to purchase the property outright, be aware that a mortgage for a non-owner-occupied property may carry a higher interest rate than one that’s owner-occupied. Lenders see it as a greater risk.
  • Beware of properties marketed as “under-rented,” meaning the market can bear a higher rental rate than that which is currently being collected. While there may be properties out there where this situation exists, they are generally under-rented for good reason! We have extensive local market knowledge and direct access to actual data to confirm or deny the seller’s claim.
  • Assuming the subject property meets the One Percent Rule, you’ll still need positive cash flow after satisfying the debt load (in the case of a mortgage) and operating expenses. If you don’t have the time or skills to manage the property, budget for the services of a property manager. Be aware that tenant emergency calls rarely come at convenient times!
  • Get sound professional advice upfront. An accountant can advise you with respect to the tax consequences of owning the property as an individual versus a legal entity, as well as recommend strategies for managing cash flow, deposits, etc. Hire an attorney to prepare (or at least review) the lease agreement and other tenancy documents you intend to use. It’s important to understand your rights, but also the rights of your tenants.
  • Give serious consideration to the length of time you plan on holding the property. Unlike the stock market, real estate transactions involve significant transaction costs (as a percentage of market value). Selling and buying property too frequently undermines your return.

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What Does a Home Inspector Look For?

Having a home inspection done before closing the deal on a new home is critical. Even though it may not be required by your lender, getting a thorough evaluation by a reputable inspector will be money well spent. I believe it’s the very best money you can spend!

It’s important to begin by explaining who a home inspector is and is not. A home inspector is not a licensed plumber or electrician, roofing contractor or HVAC technician. While an individual inspector may have a high degree of proficiency with or prior experience in one or more specialized areas of construction, they are typically more of a “generalist.” They are professionals with a thorough understanding of the home-building process, are familiar with construction materials, and have a working knowledge of local building codes. In my experience, the best home inspectors have spent a number of years working as a contractor or tradesman before becoming a home inspector.

Home inspectors are trained to find problems that may not be apparent to most people. You should expect to receive a written report with the inspector’s findings. If a deficiency or problem is discovered or suspected, they will almost always refer the buyer to a specialized contractor, i.e. plumber, electrician, etc., for further evaluation.

During the course of the actual inspection, they’ll check for possible structural defects by taking a careful look at the outside of the house. They’ll examine siding, doors, windows, decks, the roof, and even driveways and walkways. Proper grading is also something they’ll check, as improper drainage can damage a home’s foundation.

Inside, the inspector will check ceilings, doors, and walls for defects and signs of structural damage or water leakage. The attic will also be inspected for similar problems, as well as adequate ventilation and insulation. Basements and crawl spaces are other important areas that are checked to ensure there are no critical weaknesses or signs of water intrusion or other defects.

The inspector will evaluate the home’s electrical system to look for wiring problems, proper capacity and size of the electrical panel, and to make sure that unsafe wiring materials aren’t present. They’ll also check the plumbing system to determine the types of pipes are used, ensure that they are functioning correctly, and check for adequate water pressure and flow. They will inspect all fixtures, toilets, and drains for damage and proper function.

Heating and air conditioning systems will be examined for functionality and safety. They will check for the presence of smoke and carbon monoxide detectors, and possibly advise you if there are any ways that energy efficiency can be improved.

Most home inspectors are generally not trained to conduct termite, radon, fireplace or septic inspections themselves, although these are also important inspections that you should consider having done. Mortgage lenders often require buyers to have some of these inspections conducted. Your Realtor or the home inspector you are working with can recommend a list of providers for these more specialized inspections.

Lastly, it is important to understand that the inspector is making an assessment of the condition of the home on that one specific day. They can’t forecast when the water heater will stop working, when a shingle might blow off the roof, or when the A/C will need to be replaced. The home inspector is taking a snapshot of the home in time.

My best advice is to buyers when they receive their home inspection report is to focus on negotiating with the seller to resolve immediate safety issues, repair or replace big-ticket items, and not to sweat the small stuff. Many problems may not even be known to the home’s current owner. And remember, no home is free from repair needs so you’ll just need to determine which items you’ll ask the seller to address, and which issues you are willing to take responsibility for after closing.

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The Roller Coaster Emotions of Buying a Home

The process of buying a home is one of the most emotional journeys you’ll ever take. Other big purchases such as a new car or a wedding and honeymoon can also wreak havoc on your emotions – but none is likely to surpass the roller coaster of emotions that will rise and fall when you purchase a home. You may experience different emotions if you’re purchasing your first home, but even if you’ve gone through the process before, each time is different and you’ll react in different ways.

The roller coaster of emotions when buying a home can run the gamut of incomparable highs and lows that make you question your decision! If you’ve carefully researched the real estate market such as the most recent comparable sales in the area you want to buy and know the features you “must-have” — as well as those you’ll compromise on – you’re probably ready to jump on the home-buying train.

An experienced Realtor can help you work through emotions that may lead you astray and guide you to the perfect home. Excitement is likely the first emotion you’ll feel when you’ve made the decision to purchase a home, and for good reason. It’s a big deal and an exciting time!

Searching for homes online is a good way to assess what’s out there and the prices you’ll face within certain areas. After the excitement of anticipating homeownership, your excitement may turn to outright fear when you first realize how much debt is involved in homeownership. You may feel overwhelmed at all the information you have to digest and all the real estate buzz words you need to know – especially if you’re a first-time homebuyer. You’ll likely see many properties before finding one you’ll even consider. When you enter the home search you’ll probably have a good idea about what you want. But, visiting multiple properties can be confusing and you may lose sight of the priorities you set for yourself. You may change your priorities as you proceed. Your Realtor will be able to guide you to homes that truly fit your needs and your price range and take what he or she says into consideration – especially if she knows your priorities ahead of time

Stress is another emotion that’s typical of home buyers. The anticipation of purchasing a home can be much greater than the reality when you come face to face with everything involved. Don’t come to a decision based on stress, feeling overwhelmed, or just wanting to get it over with. You may overpay for a home just because your emotions get the best of you and you get overly attached to a certain home. There’s always another house that will make you happy and meet your needs. If I’ve learned anything at all in this job, it’s that the right house ALWAYS comes!

Perhaps the most stressful part of buying a home is dealing with the emotions you’ll experience once you’ve put in your offer and are waiting to see if you’re successful in getting it under contract. Don’t be too hard on yourself if you occasionally let home-buying emotions get the best of you. It’s often the largest purchase you’ll ever make and your Realtor should be trusted to lead you to the best deal possible – and one that you’ll feel a great deal of satisfaction about.

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