As a first time homebuyer specialist, many of my clients are shopping for a new mortgage. It can be a little confusing for people the first time around. Here are some tips on how to find the right loan and more importantly, a good lender. (This is part 1 of a 2 part post).

Don’t fall into “The Interest Rate Trap”
Many mortgage shoppers make the mistake of only comparing interest rates. It is very important to call 2 or 3 (or more) lenders and get a good faith estimate. Some consumers only ask about the interest rate, and they don’t ask anything else. Certainly interest rates are important, but there are many equally important factors to consider that will impact the cost of the loan. Here are a few factors you need to know about.

1. What are the costs and fees associated with the loan.
Sometimes these fees include “points” to pay now for a lower interest rate later.  Other fees will pay the mortgage broker, pay for physically mailing your signatures around, and cover filing costs.

2. What are the exact terms of the loan and how well to they fit your circumstances.
A 30 year fixed term loan will not change interest rates over the 30 year term, but will have a higher initial interest rate than a 5 year ARM which adjusts it’s interest after the first 5 years of having the fixed rate. This means your mortgage payments may increase (and possibly substantially). If you know you’ll be moving prior to that event, the lower interest rate will save you some money. Make sure there are no early pay-off fees or unexpected balloon payments (which are unusual with residential loans).

3. Will they approve your loan in a timely fashion and will they deliver your loan ON TIME with the terms they promised.
In other words, will the lender avoid last minute surprises and deliver what they promise. (Experience reveals this isn’t always the case.) The promise of a low rate is meaningless if the lender doesn’t deliver. Remember, you’re not just shopping for a loan. You are shopping for a lender.

Internet Lenders and Advertised Rates
While there may be some good internet lenders, it is very difficult to know who or what you are dealing without any personal contact. Real Estate Laws and closing procedures vary greatly from state to state which puts internet lenders in challenging position when competing against locally based mortgage brokers. It may be difficult to determine with any certainty if the internet lender has enough knowledge of Colorado Real Estate procedures to insure a smooth process. Colorado requires all Mortgage Lenders who lend in our state to be licensed you can go to http://eservices.psiexams.com/crec/search.jsp and check to make sure any lenders you talk to are approved. When you see advertised rates, look for this disclaimer – “this is not an advertisement for credit as defined by paragraph 226.24 of Regulation Z”. Reg. Z is the Federal Truth in Lending Law. When this disclaimer is present, the Lender is telling you that the ad does NOT comply with the Truth in Lending Laws!! Also, if the Lender advertises an “APR”, but NOT the actual interest rate, look out for a lot of extra fees, points and costs. Contact me with any questions about Truth in Lending laws or T.I.L. disclosures.

Part 2 of this 2 part series will cover the specific line items you’ll want to look over on the good faith estimates you’ll be getting from your potential lenders.

This article was written in colaboration with Joshua T. Dutton who works as a Mortgage Broker with Coldwell Banker Home Loans.  He can be reached at: josh@cbhomeloans.net.

Every time I help a home buyer find the home of their dreams, I warn them:  The next 45 – 60 days are going to be really emotional.  Then I walk them through each and every step before we even submit their offer.  I know that not everyone loves the ups and downs that a real estate transaction will bring.  So here is the little pep talk I give my buying clients.

There are 5 major hurdles to get through in the average real estate transaction after a contract has been signed.  Inspection, Title, Appraisal, Loan Conditions and Closing.  When you find the home you love and are ready to write your offer, it’s helpful if you have a general understanding of what happens next so that you can keep your emotions in check, plan accordingly, and know when to start packing.

Hurdle 1:  Inspection
Presuming you are not in a Short Sale transaction or a HUD transaction, the buyer’s agent will likely write the contract to close in 45 days, give or take 15 days.  (This is longer than it used to be because, in the current recession, loans are taking longer to close. It is very difficult to close a loan in 30 days right now.) It is important to work out a realistic time table so you can plan your life, move, and first backyard BBQ.  If the time table is too short, you’ll be changing your plans with every extension request.  If the time table is too long, both you and the seller are going to struggle to keep motivated on getting the deal done.

After the contract is signed by both parties the first thing you want to do is order a home inspection.  There is no better money spent when buying a home in Denver than this $$ here.  I will talk more later about the ins and outs of a home inspection, and when to have specialty inspections. Bottom line: Get one.  Currently a detailed home inspection costs more than $250 and less than $450 for most average sized homes. (Price is generally loosely based on the square footage of the home.)

Once you are through inspection, your agent will negotiate through the seller’s agent with the seller who will be responsible to fix any issues that came up during your inspection.  Generally, it is standard practice to request all “health and safety” items be repaired by seller.  This would include items such as a gas leak at the hot water heater, exposed electrical wiring, or missing smoke detectors.  You are welcome to ask for anything you want to be repaired, but this must be tempered with other data, like: how much $$ you negotiated off the price, how quickly you want to move in, and how badly you want the house.

All parties must come to agreement on what to fix by when and whom – by the Inspection Resolution Deadline.  This is usually no more than 10 days after contract acceptance. This date does not mean that the work will be completed by this date, just that it will be agreed to.  Generally speaking, the seller has until 48 hours prior to closing to complete the work, and if requested, to submit receipts to your agent.

Making it through Inspection Resolution is a big sigh of relief, but don’t unfasten your emotional seatbelt.

Hurdle 2:  Title Commitment
The next hurdle is Title Commitment.  While this is largely a Real Estate Agent deadline, as there isn’t any work for the buyer to do, it’s important all the same.  Title Insurance is customarily paid for by the seller, unless HUD or some banks own the property.    Title Commitment comes to your agent, the seller’s agent and you, by the Title Commitment deadline.  It’s a document of substantial size, 15 pages or more that outlines what the Title Company has discovered about the history of your property.  The Title Company is committing to insure that at the transfer of Deed in your transaction, you will be the only party with interest in the property.  There aren’t any outstanding liens against the property, such as an unpaid water bill or mechanics lien from the owner 15 years ago.  A good agent will read this document in its entirety and make sure all exceptions and agreements meet the intended use of the property.  Just the other day, I was reading a Title Commitment, and found a clause about “mountain view restrictions”, which had mistakenly been inserted from another home’s neighborhood requirements. Had we not found and cleared that requirement, it would have been a huge problem for my buyer who planned to scrap the home on the property and build a new 2 story home.

This may be an invisible step for you the buyer, but it there are issues on the Title Commitment document that affect you negatively, you’ll be having discussions with your agent about how to proceed.  Many transactions do not have any issues during this hurdle and after the Title Commitment deadline you can consider starting to pack your out of season clothes.

Hurdle 3:  Appraisal
Next comes Appraisal.  This cost is paid by the you, the buyer, at closing. Currently these cost about $450.  Some lenders will pay this fee for you, but typically you’ll be paying for it somewhere else.  The appraisal is a big deal for first time home buyers due to FHA guidelines.  Most first time home buyers get an FHA loan rather than a conventional loan because the down payment requirement is only 3.5%, rather that 20% for conventional.  While this is a huge help to many, there are additional hoops to go through to make FHA happy.  The house has to be in fairly good condition.  FHA appraisers use a different check sheet than Conditional Loan appraisers and look for things like water damage, peeling paint, rotted wood, broken windows, and electrical lines obscured by trees.  (This is not a complete list by any means).  Many times, a family will not ask for anything at inspection because they just want to move in, and they intend to fix the problems as they go.  While this is fine in theory, FHA may want to protect their asset more than you and they can require repairs to the property in order to insure it meets their standards.

You generally don’t get to see a copy of the appraisal.  Your agent will hear from the lender that all went well or that repairs will be required.  In a HUD deal, the properties are pre-appraised but sometimes there are repairs noted that are not disclosed on their website.  This can be frustrating, and additional required work is never a fun surprise.  Never.

If your dream home appraises for the agreed purchase price (or more) and there are not any surprise repairs asked of the seller, now is the time that you order the truck and get some boxes off Craigslist.  Appraisal is usually a week before loan conditions deadline, which is just around the corner from CLOSING DAY!

Hurdle 4: Loan Conditions
Finally, loan conditions is d-day.  You’ve made it through Inspection, Title and Appraisal.  You have all your bank documents and student loan deferral papers into your lender.  His number is now on speed dial in your phone.  Appraisal is in; your loan has been sent to “underwriting” for review.  They work behind a magic curtain, and I have never seen an “underwriter” out in broad daylight.  I think they are a part of the witness protection program because they will make or break your financial future with a final approval saying that they will in fact be funding your loan.

If you hear from your lender that you’ve come through underwriting with a green light, your loan has been approved!  You are very very close to being a home owner.  The Loan conditions deadline is usually a week before closing so that everyone has time to get all paperwork to the Title/Closing Company to prepare final documents.  If you can’t get approved for a loan, you are usually able to get out of the contract at this point with your earnest money. The emotions of getting this far, doing this much work, and then not getting a loan closed can be brutal.  The better route is to fight tooth and nail to secure that loan and make the infamous “underwriters” salivating over funding your loan.

Hurdle 5: Closing
So, now you’ve made it through four big hurdles, all that’s left is taping the boxes, labeling them and loading the truck.  The final hurdle, closing day is in a week or so!  If this whole process has gone faster and more smoothly than expected, all parties may agree to move the closing up.  Otherwise, get busy figuring out where your nearest new grocery store is and get your Cashier’s check with the amount of money you need to bring to the closing table from your bank.  Your agent or lender will get you a statement called Buyers Settlement Statement with the amount you will need to bring on closing day.  Your lender should go over this statement with you line by line until you are comfortable with every number on it. Don’t feel bad about asking.  Mortgage brokers who love there job, love to talk about this sort of stuff (like a good mechanic likes to talk about car engines). You are not a hassle, you are their client, and they want to discuss this stuff with you.

Closing day!  Breathe a sigh of relief, you’ve made it.  A word to the wise: Plan your closing date for a Wednesday if you can. Don’t schedule your friends and moving truck for an hour after you expect to be done at the Closing table.  So many things must come together at the last minute; it’s like 500 birds all landing on one picnic table at the same time.  Book time in for the unexpected, because the unexpected WILL happen.

Plan to move 48 hours later AT LEAST to allow for push backs and delays. Consider scheduling a few days to clean up the new property or paint some rooms before you move all your gear in.  You won’t believe how much easier your life will be if you don’t have additional pressure from a UHAUL reservation or 30 moving buddies scheduled.

Once you make it through closing, take yourself to dinner to celebrate and move in the following weekend.  At closing you get the keys to your new home. That’s the finish line.  Now you can take a deep breath and step out of the real estate roller coaster.  With my clients, I work hard to keep the entire ride enjoyable and fun.  The joy of buying a new home is wonderful, but the process has some important hurdles to jump over.  Knowing them before you even begin means you can be prepared for the right type of race.  Good luck and we’ll celebrate at the finish line.

HUD stands for Housing and Urban Development which is a part of the United States Federal government (currently overseen by Alphonso Jackson (and to transition to Shaun Donovan in January, 2009), who sits on the President’s Cabinet).  HUD homes are government owned properties that are for sale by the government using a bidding system outside of the standard buyer/seller multiple listing service (or MLS).

The government acquires many of these properties through foreclosures on loans that they guaranteed through the Federal Housing Authority (FHA).  In times when foreclosures continue at reasonable levels, these properties tend to have significant wear and tear, and many times, significant damage.  In our current market, foreclosures levels are unusually high, and the condition of some foreclosures can be much better than typical.  In the bidding process for HUD homes, your licensed Real Estate Agent submits a price bid to HUD for a property.  After the bid-acceptance deadline (varies by property) your agent will be notified via email if your bid was accepted.  If your bid is accepted, you will close on your new HUD home 45 days later.

One major difference between buying HUD vs. buying on the “open market” or bank-owned home is that HUD requires you to already have funding prior to submitting a bid.  This means you need more than a pre-qualification letter from a lender, you need an approved loan from a lender and documation of available funds.  Also, if you have to extend your closing date for any reason, you will be fined a significant amount of money (currently $375 for each 15 day increment).  Another difference is the way closing fees are typically split between buyer and seller in a normal transaction. When buying a HUD home, who pays the closing fees is not negotiated, and of course, the buyer pays for all of them.  It may seem obvious, but just to be clear, all HUD purchases are bought “as is.” While you can inspect to heart’s content, the government orders (and pays for) an appraisal and an inspection, and discloses those to you through your agent. They don’t make repairs for you.

For more information, check out the HUD website.  The HUD website has a pretty good FAQ on buying HUD homes here.

What a busy summer.  Not too busy to check out a farmers’ market.  I went looking for times and found Nina Davidson’s About.com guide a good starting place: Top Five Farmers’ Markets in Denver. Of course we like number 3 (as it’s short bike ride away from our home), although number 2 isn’t a long drive either and is close to Tattered Cover for a little book time.

I offically declare 2008 the year of the first time home buyer in Denver. Is this too bold?  Perhaps, but maybe it’s not that contraversial of a statement anyway. I was watching a Real Estate broadcast about depreciation risk, and reflecting on who it most impacted.  I looked up the three month old article to remind myself the details from the original report. I think this year (and probably next year) will be a great buyer’s market for new home buyers as well as rental property investors.  For many lenders, first time home buyers are defined as someone who has not owned a home for the last three years (aka: one can be a “first time” buyer more than once).  The advantages afforded first timers typically come from government insured programs (FHA) and attractive lender mortgage products (material for a future post I suspect).  Of course the few people who need to move from a strong market to a weaker market will also benefit from the buyer’s market, but that is always true by definition.  All that to say, I think right now Denver is a great place to own a home, and renters who can make the leap into home ownership should seriously consider this year a the time to jump. For a national perspective (which says “it depends on local factors”) see the Wall Street Journal’s recent article.

A “buyer’s market” favors individuals and companies that are buying real estate. This is caused by an excess of supply over demand. The “market” refers to a local real estate environment (a city, town, neighborhood).  This is not to say that state-wide and national factors don’t impact local markets, but it does mean that local factors (job markets, local economies, crime rates, education oportunities, etc) will almost always trump national factors.  So a “buyer’s market” implies that it is a good time to have access to money in order to purchase real estate.  The implications of a “buyer’s market” on buying and selling are foder for many future posts, but some signs would look familar to us right now.  Signs of a buyer’s market include higher than average for-sale inventory (homes actively for sale), a list-to-sell average dipping well below 100% (homes are consistantly being sold for less than the sellers are initially asking), and days-on-market averages (time a home has been for sale) rise beyond the three month mark (my own line in the sand). 

A “seller’s market” would be the oposite.  When inventories are low and demand is high.  When it is uncommon for property to be sold without a bidding war between multiple possible buyers, it is a strong seller market.  More commonly, a seller market looks like flat or decreasing inventory levels, prices increase, and appropriately-priced houses moving off the market quickly.

NPR had an All Things Considered episode that was really good today.  What happens when you buy a really old house and decide to make it the picture of the environmental movement?  Major renovation becomes a massive understatement.  Can synthetic materials suppport “green ends”?  When is plastic your friend?  Stay tunned for these an more riddles, same bat time, same bat channel. 

I have been enjoying www.denverinfill.com and its blog.  Talking to some comercial real estate friends, they tell me the author has really made a name for himself, and it’s clear why.  It’s fascinating to see all the plans for buildings that might fill in our skyline.   I have to admit, I find this post particularly humorous.

I enjoyed reading the post on Lighter Footstep on ten ways to lighten your impact on the planet.  It’s kind of a first things first approach that puts personal ecological improvement within reach.  I confess, I was pointed to the article by the Organized Home blog which I frequently enjoy.  Surprisingly, of the ten first ways to lessen your eco-load, only one duplicated my article on five ways to start green in your new home (the CFL light bulbs).  It seems quite possible a Spring cleaning list of twenty five or thirty ecologically savvy once a year things could be a great resource.  Anyone seen a good one of these? Let us know.

State Senate Bill 187 would require Carbon Monoxide Detectors in all homes sold after July 1st!  Not just new homes, but any home sold.  Apartently from the 9news article I read, the bill has just been brought out of committee, which means it has several steps before becoming state law. As far as I can tell, the biggest impact of the bill is found in this clause (skip ahead if you want my “transalation”):

 NOT WITHSTANDING ANY OTHER PROVISION OF LAW, EVERY EXISTING SINGLE-FAMILY DWELLING OFFERED FOR SALE OR TRANSFER ON OR AFTER JULY 1, 2008, THAT HAS A FUEL-BURNING HEATER OR APPLIANCE, A FIREPLACE, OR AN ATTACHED GARAGE SHALL HAVE AN OPERATIONAL CARBON MONOXIDE ALARM INSTALLED WITHIN TEN FEET OFTHE ENTRANCE TO EACH ROOM LAWFULLY USED FOR SLEEPING PURPOSES.

My translation (remember, I’m not a lawyer or legislator): Assuming there is not a more stingent law, this law would require all future homes sold in Denver (since all homes in Denver have some method for heating), to include Carbon Monoxide Alarms to be installed properly (within 10 feet) of all bedrooms.

While there are implications for multiunit complexes that investors will want to know about, the above clause will affect the most people and in dramatic ways. Carbon Monoxide detectors are not terribly expensive, but I’ll be interested to see how the installation requirements finally get coded into the final law.  Also, there are two other portions of the bill that make me wonder how they will be coded into law and enforced.  First the section on the the building permits would require everyone doing any renovation that would require building permits to also put these detectors in.  How would that impact the enforcemnet of renovations done without proper permiting?  Would homeowners be in substantually more trouble for renovations they unknowingly violate permitting requirements while doing?  Second involves the restriction on electrically disabling the detectors.  Would this mean that the homeowner could face criminal charges for removing the battery from a CO detector in her home (without replacing it immediately)?  

Too many questions?  Probably.  But I know it makes a difference for my clients and it’s a part of the job I love.  It will be fascinating to see what our legislators come up with.