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Real Estate Buyers Packet

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					Company Overview


 
 California
Real
Estate
&
Mortgage
is
a
full‐service
real
estate
brokerage
firm,
 dedicated
to
providing
each
of
our
clients
with
unmatched
quality
service.
We
 maintain
consistent,
open
lines
of
communication
with
our
clients,
listen
to
their
 goals,
and
then
customize
a
strategy
that
takes
into
account
all
aspects
of
their
 distinct
situation.

 
 Our
commitment
remains
focused
on
servicing
the
unique
needs
of
our
clients:
 From
assisting
a
family
with
their
first
home,
to
helping
investors
structure
their
 next
real
estate
investment
–
we
guide
our
clients
every
step
of
the
way
through
the
 high
stakes
of
real
estate.
 
 We
have
assembled
a
team
of
experts
who
have
demonstrated
high
standards
of
 professionalism
throughout
their
careers.
All
of
us
at
California
Real
Estate
&
 Mortgage
are
guided
by
a
strong
set
of
values,
which
include
integrity,
loyalty,
 commitment,
and
professionalism.
We
are
devoted
to
ensuring
that
these
values
 characterize
all
of
our
interactions
with
you.
Our
team
is
experienced
and
 determined
to
protect
your
assets.
 
 We
are
driven
by
an
entrepreneurial
spirit
and
are
constantly
looking
for
ways
to
 stay
competitive
in
this
ever
changing
market.
Our
company
is
the
right
choice
to
 assist
you
with
all
your
real
estate
needs!
 


Our
Services
Include:


 • • • • • • • • •

Appraisals
&
Broker
Price
of
Opinions
(BPO)
 Buyer
&
Seller
Representation
 Comparable
Market
Analysis
(CMA)
 For‐Sale‐By‐Owner
Listing
Service
 Income
Property
Evaluations

 Loan
Origination
&
Refinance
 Property
Management
Services

 Relocation
Services

 Rental
Service


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.com
 866.538.6057


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1



Home
Buyer's
Guide,
Part
1:
 Can
I
Afford
to
Buy
a
Home?

So you're thinking about buying a home? And you're trying to decide if you can afford it? Well, pull up a chair, take out a pen and paper, and let's decide. Regardless of what type of home you choose, buying a house or condo usually requires getting a loan and making monthly payments. First, Make a Budget The first step to home buying is budget preparation. Make a list of your fixed expenses (those that don't change every month), such as car payment, rent, and child support or daycare. Don't forget to include incidentals such as cable TV, trash pickup, and cell-phone bills. Then list your variable expenses (those that change a little), such as entertainment, groceries, savings, and charitable contributions. You'll also need a list of periodic expenses (insurance, medical deductibles, birthday presents, and repairs). If you pay insurance every month, list it under fixed expenses. The idea is to get the best financial picture of yourself as possible. Make a list of all your bills and add it up. Your list might look like this: Fixed Expenses Rent or mortgage Electricity, gas, water Car insurance Telephone, cable TV Totals Variable & Periodic Expenses $900 Gifts, savings $195 Groceries $95 Entertainment $125 Charity $1315 $100 $225 $50 $100

This budget must be tailored to your expenditures. Your water bill alone may be $100, or the $225 earmarked for groceries may barely cover your monthly pizza bill. If you have no idea what you shell out, keep a spending journal and record every cent you spend for one month. It's a time-consuming, tedious process, but it demonstrates very clearly where you're spending (or wasting) your hard-earned money. Take a Good, Hard Look The second step is to look at this list and compare what you bring home with what you spend. If the difference is positive, you're doing great. If the difference is negative, cut back and rethink what's important. Where can you cut back? One less cappuccino every day? On-board haircuts? A Sentra instead of a Corvette? You make the decisions depending on how much spending needs to be curbed. Play It Smart Continued wise use of credit during your planning period is essential to maintaining your credit health. The lender will pull your credit, or FICO score, which is basically a

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snapshot of your willingness to pay back money you've borrowed. Your FICO score loses a couple of points every time you fill out a credit application. Get Prequalified The best idea is to get "prequalified" with a mortgage lender. A loan officer will take your loan application, pull a credit report with a FICO score, and submit your file to underwriting for preapproval of the maximum amount you'll qualify for. Prequalification lets you search in the right price range, it offers negotiation power with the seller, and it speeds up your loan approval process. The lender will calculate your front-end and back-end ratios. Your front-end obligation, or housing ratio, is the total of your monthly housing payment divided by your gross monthly income. The back-end ratio, or debt-to-income ratio, is the total of all monthly obligations divided by your gross monthly income. Things to Consider The most important part of buying a house or condo is to decide what payment you're comfortable with. If your rent payment has never been over $650, a mortgage payment of $1,400 may cause payment shock even if you can afford it on paper. And along with bigger houses come bigger utilities, property taxes, insurance rates, and maintenance expenses. Planning and budgeting are the two main ingredients to a successful home-buying experience. You'll want to buy as much home as you can, but also only as much as you are comfortable with.


 
 
 
 
 
 
 
 
 
 
 


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Home
Buyer's
Guide,
Part
2:
 Getting
the
Best
Mortgage
Deal

Buying a mortgage isn't much different from buying toilet paper, a can of soup, or a car. Think of a mortgage as a thing you can hold in your hand. When you compare cans of soup at the Commissary, you compare the size, the taste, and maybe look at the ingredients: carrots, potato starch, onion power, disodium granulate (what is that, anyway?). So do the same thing with mortgages — the three primary ingredients to look for are: rates, fees, and service. Understanding Points Assuming you know the loan type and amount you're looking for, you're ready to shop rates and fees. Mortgage companies charge "points": one point is 1 percent of the loan amount. The "origination point" is almost always 1 percent and that's the lenders profit. "Discount points" are the points charged to lock in a certain interest rate for a period of time. You are, in essence, buying a commitment from the mortgage company to close your loan at that interest rate. Points change every day and fluctuate with the stock market. A poor Dow Jones usually means improved mortgage rates. The rule of thumb is: If you can happily live with the rate and point quote, lock in and don't look back. Unless you're investment savvy (and even the experts are having trouble nowadays), the market can flip either way, costing you a great lock-in opportunity. You can almost always negotiate discount points. Lenders publish their quotes for the day in-house, and that's the price the loan officer is supposed to sell to make a basic commission. You probably won't be allowed to see the rate sheet, but ask. Loan officers are paid "overage" on the excess discount points the borrower pays. It's both fair and civilized to ask the loan officer how they are compensated. How do you know you're getting a good deal? Have a friend call the mortgage company anonymously and ask for today's quote. Compare their offer with yours. Also, try calling around before you lock in. You want the mortgage companies to be competing for your business, so let them know what kind of deal their competitors are offering you and ask if they can beat it. Make sure you're comparing apples to apples. You pay for the rate you buy, so a "zero points" loan means you are buying a higher interest rate, or not paying for a lower interest rate. Negotiate Those Fees Fees are also negotiable. Veterans Administration (VA) loans and Federal Housing Authority (FHA) loans dictate what fees are allowed and how much they can be. These authorities protect borrowers and act as watchdog groups against excessive charges. Conventional loans (see Fannie Mae and Freddie Mac) allow other fees, such as application, underwriting, and processing fees, which may or may not be expenses incurred by the mortgage company. Question these fees, ask that they be dropped or reduced, and look carefully for other "junk fees," such as warehousing and documentation fees and ask that they be

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dropped also. Be sure to ask if fees are refundable. Compare the annual percentage rate (APR), which calculates how much you actually pay once all these fees are added in. The loan officer's responsibility includes collecting documents for underwriting, ordering the appraisal, submitting the loan, locking in the loan rate, and then, hopefully, telling you the loan was approved. A good loan officer will have a plan of action to combat any poor credit or income verification issues. Some lenders offer automated underwriting, done by a computer, that's very fast and efficient. Other lenders offer on-site underwriting, which means the loan officers are probably on a first-name basis with the underwriter. Others may have to use offsite underwriting and may not know the underwriter at all. This is generally the slowest process, but can be most helpful if a particular underwriter has wider guidelines or tends to be more lenient. With a little homework, you can end up with a satisfying mortgage that fulfills your appetite for a new home, and leaves you with a good aftertaste.




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Home
Buyer's
Guide,
Part
3:
 Understanding
Loan
Lingo

The mortgage industry has a language of its own that rivals anything the military can dish out. When applying for a mortgage loan, you'll run across a shipload of acronyms and jargon. From URLA to COE and from HUD-1 to DU, each piece of jargon has important meaning to your loan and what happens to it. The terms you're likely to meet when applying for a loan are illustrated when we follow a loan application through the process of approval. Initially, the prospective borrower brings a pile of documents from a pre-assigned list to a loan application meeting. • Military members need to bring their certificate of eligibility (COE). If you don't have it, the mortgage company can obtain it for you with either a DD214 (discharge papers) or a statement of service for active-duty members. Borrowers bring pay stubs or leave and earnings statements (LES), original bank statements, and any credit documents. A copy of any divorce decrees and child support orders, if applicable, and a copy of the purchase contract will be needed.

• •

At the loan application meeting, a loan officer (LO) assists the borrower in determining the best loan of type and maximum loan amount the borrower can qualify for, based upon his or her debts and credit. The loan officer helps the borrower fill out a uniform residential loan application (URLA) or 1003 — fancy names for the three-page formal mortgage loan application. The next step is to run a quick "in-file," a short credit report with a FICO score, which provides an indication of the borrowers future credit risk. The loan officer calculates the front-end ratio, the total monthly housing payment divided by the borrower's gross monthly income. The back-end ratio, or debt-toincome ratio, is the total of all monthly obligations divided by gross monthly income. If you hear yourself called a 28/36, that simply means that your ratios are within optimum conventional guidelines. The information gathered by the loan officer is entered into a mortgage software program that generates a good faith estimate (GFE), which is a best guess of fees you'll incur at closing, and a truth-in-lending (TIL) document, which discloses the annual percentage rate (APR) and the terms of the loan. The APR is the interest rate for the total loan, including all fees, and is the best way to compare loans. The TIL document shows the total dollar amount you'll repay over the life of the loan, including interest. The loan is then processed and sent to underwriting. The underwriting might by done manually or with a computer-based underwriting system that helps mortgage lenders collect and analyze the information needed to process mortgage loan applications. These automated underwriting programs, Desktop Underwriter (DU) and Loan

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Prospector (LP), were developed by Fannie Mae and Freddie Mac, the leading purchasers of conventional mortgages in the United States. After the loan is approved, and the "stips," short for "stipulations," or loan approval conditions, are cleared, the borrower is ready to schedule closing. At closing, the borrower signs a mountain of paperwork, including: • • • • a deed, which transfers property ownership from seller to buyer a note, a legal IOU from the buyer to the mortgage company a deed of trust, a legal document giving the mortgage company the right to seize the property in the event of foreclosure the HUD 1, also called the settlement statement. This is like an accounting spreadsheet for the loan, outlining exactly what the buyer is paying, what the seller is paying, and to whom every penny goes. a final TIL document, revised URLA, assorted mortgage company disclosures, survey, title insurance, pest inspections, and various other inspections required by the underwriter at loan approval.

•

The loan application is then returned to the mortgage company, checked for errors, copied, shipped, serviced, and usually sold on the secondary market. The transformation is complete.

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Home
Buyer's
Guide,
Part
4:
 Negotiate
a
Sales
Price

Before you negotiate a sales price, it's important to determine if you or the seller has the stronger position. Knowing this will help you plan your negotiation. The seller may have the stronger position if: • The local real estate market is strong and homes are selling quickly. • They aren't in a rush to move. • Similar houses have sold for close to or above their asking price. The buyer may have the stronger position if: • The local real estate market is weak. • The seller needs to move quickly. • The house has been on the market for a long time. When negotiating, more information is better. Look at your notes from when you looked at the house. If there's anything in need of repair or replacement, you may include these costs in the negotiation. If you want certain appliances or fixtures to stay, be sure to include them in the negotiation. You may also want to make your offer contingent upon your obtaining financing or the house passing a professional home inspection, especially if it is an older home. There are several steps to negotiating: • Asking price. This is the price the sellers have originally listed. In a buyer's market, you may be able to successfully offer below the asking price. However, in a seller's market you may want to be prepared to offer more. Before making an offer in a seller's market, know how much above asking price you are willing, and able, to bid in case the seller gets multiple offers. • Initial purchase offer. This is your first offer. It may include contingencies (such as a requirement that the home pass a professional inspection or that you receive adequate financing from your lender.) • Acceptance of offer or counter-offer. The seller can accept your offer or make a counter-offer of a new price or additional contingencies. If you've made a home inspection part of the contingencies and something serious is found during the inspection, you may want to submit a new counter-offer and discuss the situation with your lender. The process may go back and forth several times before you and the seller reach an offer that is acceptable to you both. Remember that in some instances, your lender may not approve your mortgage if the home has serious deficiencies that could affect its value. • Escalation clauses. If you live in a market where homes are selling quickly and have multiple offers, your contract may need to be offered with something called an escalation clause, which allows the offer to increase by certain dollar increments if another competitive offer is obtained and entertained by the seller. A word of caution about a "hot" market www.
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If the real estate market where you are looking to buy is "hot", meaning that the houses are selling quickly and often for above the asking price, don't be tempted to bid more than you can afford for a home. You may find that you are outbid on a number of houses but don't be discouraged – the right home is out there. Remember, it is truly only the perfect home for you if you can afford it. If you get caught up in a hot market, you may find yourself with a bigger mortgage than you can comfortably afford.

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Home
Buyer's
Guide,
Part
5:
 Make
an
Offer
in
Writing

This is the time to think carefully about what you want and what you can afford. If your offer is accepted, it becomes a legally binding contract. Make sure you don't include anything in the offer that you're not totally comfortable with doing. Make sure you put everything in writing. Offers usually include items like: • Proposed purchase price Remember, the seller may counter-offer with a higher purchase price - consider that when you decide on your proposed purchase price. • Concessions This includes things you'd like the seller to help pay for, like closing costs. • Conveyances This covers any personal property to be included in the sale, like the washer and dryer or the refrigerator. • Home inspection contingencies Make sure you're prepared if the home inspection report shows major problems. • Earnest money Earnest money is a deposit you offer to show you're serious about purchasing the house. Earnest money is usually held in escrow and applied to your closing costs at settlement. If you fail to meet the terms of your contract, you may lose this deposit. • Acceptance This covers how long the seller has to respond to your offer before the offer is no longer binding. • Mediation and arbitration These are legal methods for handling contract disagreements between you and the property seller. These methods are not necessarily beneficial to you, and you do not need to agree to them. When the Offer Becomes a Contract Once the seller accepts your offer, the offer becomes a contract – you've contracted to buy a house. What's in a contract varies from state to state, but some common things you'll find include: • Legal description This describes the property you are buying in terms of its dimensions relative to a fixed point (like a road) or in relation to a recorded subdivision plat or declaration of condominium. It often includes the street address of the property. • Selling price and deposit This is the price you and the buyer agreed upon, as well as the amount of earnest money you'll pay when you sign the contract. • Mortgage contingency A contingency protects you by stating that the sale depends on a lender approving you for a specific mortgage, rate, and term.

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Closing date and location The closing date (also called the settlement) can be several weeks to several months away to meet the seller's and your needs. • Conveyances Double check these conveyances to make sure that the items are there and are what you and the seller agreed on in the offer. • Home inspection If you've made the contract contingent on a home inspection, this will set an inspection date and provide an explanation of what will happen if the inspection identifies any problems. • Possession date This is the date you can move in. It's usually the closing day or very soon after it. • Property insurance This details the home insurance policy that will cover the property until the closing date. This can be the buyer's or seller's policy. • Property disclosures This includes legal notification of any required information concerning the property (such as copies of documents from the homeowners' association), issues or problems with the property. Resources Do your research. Offers and contracts can, and should, include other items specific to the property you’re buying. For example: • Condominiums. Make sure you’re aware of any terms associated with buying the condominium, including requirements from the condominium association. • Well and septic tank. If the property has either, they must be tested and pass inspection.
•

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Home
Buyer's
Guide,
Part
6:
 Title
Insurance

Although most insurance covers you against what might happen in the future, title insurance and owner's title insurance are the only forms of insurance that protect you from things that might have happened in the past. The land your home is built upon has a long history of use and ownership. The recorded history of land ownership is called a "title" or a "history of the title." Selling a piece of property to someone else is called "transferring title." When a mortgage company lends money to someone for the purchase of a home, the mortgage company, or escrow agent, orders a "title search." Essentially, someone from the title company searches the records in a county clerks office, a recorders office, or from privately owned "title plants." These records might be kept on index cards or punch cards, or in tract books, which are often big, musty bound books the size of a small coffee table with yellowing pages. Some records are computerized, but converting this data can take years and gobble up tax dollars. A title search endeavors to ensure that taxes are paid up to date, the seller is the true owner of the home, all previous mortgages have been paid, and the title is clear from judgments and liens. In the event a blemish is found, the item must be disposed of or shown as an "exception to title coverage." Depending on the exception, the mortgage company may request the title company to "insure over" the exception, or accept the exception. (Say that 10 times fast.) The borrower never hears about title exceptions unless its a really heinous problem that can't be fixed easily. Title insurance is strictly an American institution. The first title insurance advertisement was published in 1876, pushing protection for the purchaser of real estate. Modern mortgage companies require the borrower to purchase a "lenders title insurance policy" to protect the mortgage company in the event the sale of your home is found to be fraudulent or other problems arise. Often the seller pays for the title insurance, depending on local custom. One way to save money is to find out who issued the previous title policy and ask for a reduced or "re-issue" rate. Lenders title insurance, sometimes called "mortgagees title insurance" or "loan title insurance," doesn't protect the borrower. If a really major claim against a homeowner is found to be meritorious, the homeowner could lose the down payment, the house itself, and still owe the balance of the mortgage. This is where "owner's title insurance" steps in. For a one-time fee, payable at the time of closing, the title company will issue a policy that pays all legal fees if a claim arises, as well as your actual losses up to the face amount of the policy. Owner's title insurance is a relatively cheap method for achieving peace of mind. A claim could arise, for example, if long-lost heirs appeared, insisting the house belonged to them. A claim could arise if a mistake is made at the recorders office and a recorded lien is missed. Unpaid federal taxes, forged signatures, mentally incompetent sellers, and deeds that contained errors from the past could all result in

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a claim. A seller might have granted an easement for the neighbors shed and have forgotten to tell anyone. With luck, any problems like these would show up with an accurate survey. New construction and recently renovated properties can be particularly vulnerable to claims known as "mechanics liens," which are claims filed against the property by contractors, plumbers, electricians, or anyone else who worked on the home.


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Home
Buyer's
Guide,
Part
7:
 The
Final
Walk­Through

Finally, the day you've long anticipated is in sight. You're going to be a homeowner. But wait. There's one more very important thing you have to do before closing … (drum roll please) … the final walk-through. Usually the agent schedules the final walk-through for somewhere between a week and two days before closing. The walk-through is the buyer's final chance to make sure that everything in the home is the way it's supposed to be, according to the sales contract. Not every buyer demands a final inspection before closing, but chances are those people don't wear seat belts and eat greasy fries every day. If you don't get a final inspection, it probably won't kill you, but you may be unhappy with the consequences. What to Look For At the final walkthrough, take a witness, preferably your agent. Whether you find two or 222 things wrong, make a list on paper. This is your last chance to correct problems. Use this partial checklist as a guide. • • • Take along a small appliance, such as a radio or hairdryer, and check every outlet. Make sure appliances that the contract stipulates are to be left in the house are actually there. Check for curtains, window treatments, lamps, chandeliers, etc., that were supposed to be left. Even check the landscaping, if part of the contract and appeal of the home was the extensive landscaping. Believe it or not, sellers have been known to remove trees to plant at their new home. Make sure the air conditioning and heat works. (This may be a challenge if you are buying in the South in August or northern Michigan in the winter.) Turn on the dishwasher, garbage disposal, stove, and anything else you can find. Flush the toilets and turn on the showers. Kids love to help with this one.

• • •

The general rule of thumb is that items permanently affixed to the ceilings and walls, such as carpet, chandeliers, mantles, chair rails, etc., are left in the house, unless the seller specifically says they will not be staying. But, as with any other unwritten "rule," if the contract doesn't specify it, the item may be gone. New construction poses its own problems, due to the extensive work that may remain to be accomplished. Make a "punch list," (secret code for "check list,") and get the builder to sign it. This will protect you in the future and ensure that both parties are in agreement as to what remains to be done.

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If There's a Problem If you do find something wrong, you have three options:
1.

2. 3.

You can delay the closing and wait for items to be repaired. Often this is difficult because the seller may need the money to close on his next house, or the buyers may lose their "lock in" with the mortgage company. Or, maybe you're just too excited to wait. Another option is to let the item go, and make do. (Not recommended, unless it's minor.) Or, a mutually agreed upon amount of money can be placed in escrow for the repairs and held out at closing. Usually the closing agent holds these funds until both parties agree the repairs were made as contracted.

Occasionally the appraisal will call for certain repairs to be made before closing. Frequently new construction home sales have a "landscaping escrow" when the weather is too cold to seed a new lawn. The appraiser would note that situation on the appraisal. It's the mortgage company's responsibility to make sure the property is inspected, at the sellers expense, and that all repairs are completed and paid for. One final note. Look for trash left behind. If it's still there at walk-through, you're probably buying that, too.

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Home
Buyer's
Guide,
Part
8
 Closing
the
Deal
on
Your
New
Home

You've found your perfect dream house, you've made an offer the owner couldn't refuse, you've qualified for the loan, and you've made the down payment. All you have left is to close the deal, take the keys, and make the move. Everything's gone according to plan so far, but now you have to focus on one last hurdle, the closing. Finalizing your contract with your lender, the previous owner, your realtor, and your attorney takes intense planning and research. The last thing you want to have happen is to be surprised on closing day, either with fees and costs, or with unexpected obstacles like a failed inspection. Most of your closing costs and fees should have been predetermined and spelled out in your contract offer. During negotiations with the seller, you should have come to agreement with these fees. On closing day, to make sure you aren't surprised by any of these fees, make sure they are in your contract, and you have the cash to cover those expenses. Figuring out beforehand all of the closing costs and hidden costs associated with buying your new home will ensure you have the ability to get your house on closing day. Many of these costs and fees vary in amount and type by locality. It would be wise to invest in a real estate attorney or a buyers broker to check into the true costs of closing on your house. Loan Fees Due at Closing Generally, your lender assesses loan fees to offset the cost of processing and reviewing your loan request. The total amount of these fees will vary depending on the size of your loan and the lenders requirements. Also, the seller may pay some of these fees, if you negotiated that beforehand. Typical loan fees, which are due at closing, include: Administrative Fee A flat fee of $50 to $100. It is not directly tied to any service the lender provides or for costs they incur. Application Fee A fee of $50 to $100 that lenders and brokers charge to cover the costs associated with the initial processing of your loan package. Appraisal Fee This fee is between $300 and $1,000, and is to ensure that the house is worth at least as much as you are paying for it. The lender will sometimes pay the appraiser at the time of the service and then bill you for it at closing. Broker Fee Traditional brokers charge between 1 and 3 percent of the loan amount, and is the primary way they earn their money. If a broker says they don't charge a fee, they are probably increasing either the interest rate or the broker processing fee to compensate.

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Broker Processing Fee This is a flat fee between $400 and $500 that brokers charge to cover the cost to package the file, submit it to the lender, and help coordinate the closing of your loan. This cost covers the expense of processing the file internally or the cost of outsourced processing. Courier Fee Lenders may use couriers to deliver documents to the escrow/settlement firm, appraisal company, title company, or broker. Credit Report Fee This fee is $50 to $75. The credit report shows how well you have handled financial obligations in the past. Lenders often get credit reports from more than one bureau, or get a report from a company that combines credit bureau reports. Flood Check/Flood Certification Fee The lender requires an investigation to determine if the house is on a flood plain. This will cost you about $15 to $25. If your property is in a flood zone, you will be required to buy flood insurance. The average annual premium is $300, but yours will depend on the value of the home. Lender Documentation Preparation Fee This $50 to $250 fee covers the expense of drafting a mortgage agreement and other documents for closing. Lenders often have these prepared by an outside firm. Lender Origination Fee The lender may charge an origination fee. The typical origination fee is one point, or 1 percent of the loan amount. Lender Processing Fee It costs between $100 and $300 for the lender to review and process your application. Lender Underwriting Fee The lender charges you between $150 and $675 to evaluate your application to determine your ability to pay back your loan. Tax Service Fee You'll pay $20 to $150 for the lender to find out if your property taxes are paid on time.

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$8,000 Tax Credit
Home Buyer Tax Credit at a Glance
• The tax credit is for first-time home buyers only. For the tax credit program, the IRS

• • • •

defines a first-time home buyer as someone who has not owned a principal residence during the three-year period prior to the purchase. The tax credit does not have to be repaid. The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000. The credit is available for homes purchased on or after January 1, 2009 and before December 1, 2009. Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit.

The Law’s Other Provisions
In addition to the tax credit, the American Recovery and Reinvestment Act of 2009 has several other provisions that will benefit home buyers and the housing market. The legislation:
• Will help home buyers in high-cost markets by extending the FHA, Fannie Mae and Freddie Mac
loan limit of $729,750 through the end of 2009.

• Allows state housing finance agencies to help buyers at closing by advancing the credit as a loan
using proceeds from tax-exempt bonds.

• Extends the tax code section 25C credit for energy-efficient home improvements through the end of
2010; increases the credit rate from 10 percent to 30 percent; raises the lifetime cap from $500 to $1,500; expands the list of eligible improvements. For 2008 operations, expands the net operating loss carryback period from two years to five years for small businesses (businesses with average gross receipts of no more than $15 million over the previous three years). Temporarily allows exchange of Low-Income Housing Tax Credit allocating authority for tax-exempt grants and appropriates $2 billion in HOME funding for affordable housing projects. Provides a "patch" for the Alternative Minimum Tax for tax year 2009. Increases bonus depreciation and section 179 small business expensing for business investment in 2009. Increases New Markets Tax Credit allocating authority for 2008 and 2009. Delays for one year—from 2011 to 2012—the start of the three percent government contractor withholding requirement.

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Frequently Asked Questions About the Home Buyer Tax Credit
The American Recovery and Reinvestment Act of 2009 authorizes a tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009. The following questions and answers provide basic information about the tax credit. If you have more specific questions, we strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.

1.

Who is eligible to claim the tax credit? First-time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and before December 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner. What is the definition of a first-time home buyer? The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.

2.

3.

How is the amount of the tax credit determined? The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000. Are there any income limits for claiming the tax credit? Yes. The income limit for single taxpayers is $75,000; the limit is $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. The phaseout range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts. What is "modified adjusted gross income"? Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine "adjusted gross income" or AGI. AGI is total income for a year minus certain deductions (known as "adjustments" or "above-the-line deductions"), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.

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6.

If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit? Possibly. It depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose MAGI exceeds the phaseout limits. Can you give me an example of how the partial tax credit is determined? Just as an example, assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by the phaseout range of $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000. Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by the phaseout range of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $8,000 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,800. Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.

7.

8.

How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008? The most significant difference is that this tax credit does not have to be repaid. Because it had to be repaid, the previous "credit" was essentially an interest-free loan. This tax incentive is a true tax credit. However, home buyers must use the residence as a principal residence for at least three years or face recapture of the tax credit amount. Certain exceptions apply. How do I claim the tax credit? Do I need to complete a form or application? Participating in the tax credit program is easy. You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on Line 69 of their 1040 income tax return. No other applications or forms are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and first-time home buyer tests. Note that you cannot claim the credit on Form 5405 for an intended purchase for some future date; it must be a completed purchase. What types of homes will qualify for the tax credit? Any home that will be used as a principal residence will qualify for the credit. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences. I read that the tax credit is "refundable." What does that mean? The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit. For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000 home buyer tax credit. As a result, the taxpayer would receive a check for $7,000 ($8,000 minus the $1,000 owed).

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12.

I am not a U.S. citizen. Can I claim the tax credit? Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of "nonresident alien" in IRS Publication 519. Is a tax credit the same as a tax deduction? No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS. A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $8,000 in income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer’s tax liability would be reduced by $1,200 (15 percent of $8,000), or lowered from $8,000 to $6,800.

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Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 tax return? Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment. Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties. Further, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds. Some state housing finance agencies, such as the Missouri Housing Development Commission, have introduced programs that provide short-term credit acceleration loans that may be used to fund a downpayment. Prospective home buyers should inquire with their state housing finance agency to determine the availability of such a program in their community.

15.

If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return? Yes. The law allows taxpayers to choose ("elect") to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount. Taxpayers buying a home who wish to claim it on their 2008 tax return, but who have already submitted their 2008 return to the IRS, may file an amended 2008 return claiming the tax credit. You should consult with a tax professional to determine how to arrange this.

16.

For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest? Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.



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