As someone ready to invest in real estate, you likely don’t need us to give you the basics of how mortgage lending and taxes work. However, perhaps a quick reminder of financial considerations will better enable you to make an informed decision when contemplating your real estate purchase. Let’s talk about the Bottom Line and how much does it cost to buy a home.
CASH PURCHASES
Making an offer a cash purchase can be a big plus in your favor, compared to someone who needs a bank lender.
Because a mortgage carries potential opportunities for the deal to fall apart, a cash offer is perceived as much stronger. And a cash purchase is able to close more quickly than one that includes mortgage financing, which may also make it more desirable. Keep in mind that sellers will require documentation to prove you have sufficient funds to make the cash offer, such as bank statements and references from a financial advisor. Be sure to black out all account numbers and tax IDs on these documents. Be aware that a “cash offer” simply means you are waiving the mortgage contingency in the agreement and that you are able to close regardless of what a lender may say about your credit worthiness.
This means you may still be able to avail yourself of financing, if you so choose, you just can’t make the purchase subject to financing. When rates are low, many “cash buyers” will still finance so as not to tie up funds. Just be sure to allow yourself sufficient time in the contract for the lender to approve and close your loan and understand that things like a low appraisal or even outright rejection of your loan application will not be considered a legitimate reason for canceling the purchase.
MORTGAGES
If you are not paying cash in full, a good mortgage lender will be an important member of your team.
Loan officers are aware of the various loan programs available and can best advise what is right for you. While many require at least 20 percent down, there may be other programs available which will allow for less.
Whatever the size of your home loan, expect to have scrutiny of your credit, debts and assets. This process can be challenging and time consuming. Mortgage pre-approval should be one of your first steps when starting the process and, even better, you can apply for the loan upfront – pending identification of property. This means you can get fully approved for an amount so that once you find a home you can negotiate more strongly and close much more quickly than if you had only a mortgage pre-qualification or even a pre-approval.
All of this will make your offer more desirable in a multiple bid situation. Discuss strategy with both your real estate agent and loan officer. Your loan officer will also provide a Good Faith Estimate which itemizes the expected expenses relating to closing this transaction including loan origination fees, “pre-pays” of taxes and insurance, and other related closing costs. Use our online mortgage calculator to estimate your monthly mortgage payment at resourcesrealestate.com/mortgage- calculator.
FINANCIAL ADVICE
If ever there was a time to lean on your professional financial advisor, this is it!
Emotion can get ahead of logic when you find a home you fall in love with, but your advisor can give you common sense evaluations of how this investment sits within your other commitments and long term aim. As it relates to second-home purchases, likewise, your financial advisor may provide guidance for how best to pay for it, possibly using the equity in your primary residence or pulling funds from another investment vehicle.
For commercial real estate purchases, programs like a 1031 exchange may offer tremendous tax benefits and reduce capital gains. Your advisor should be able to provide insights that will be helpful to your overall goals.
TAXES
The cost of any real estate will include annual property taxes. The tax rate will vary depending on the town it is in.
Remember that the current tax amount at the time of purchase may not reflect your ongoing obligation post-closing. These taxes may increase over time, as well.
There are some additional considerations regarding the expense of purchasing a home including the “mansion tax” (a 1% fee paid by the buyer on homes sold for more than $1million.)
PROPERTY INSURANCE
Property insurance is another annual expense and, depending on location, additional coverage for wind and flooding may be required, as well.
Both property taxes and insurance will be billed to you as part of your monthly mortgage payment. This will be paid out by the lender to the appropriate parties. A pre-payment of the first year’s property insurance is required at closing.
TITLE SEARCH AND INSURANCE
An important consideration when purchasing any property is confirming that the seller is legally able to transfer ownership.
A title search is a responsibility of the buyer. It is a process of examining public records to verify the legal ownership of a property. It also will reveal any liens or other claims that may affect the property’s title. This is done prior to closing by a local title company. You want to ensure that the buyer is getting a clear and marketable title.
A title insurance policy is issued after the search confirms there are no items of concern. The one time cost of title insurance is paid at closing. The cost is set by law, so there is no real need to ‘shop around’. Calculate your approximate title costs at our affiliated company, Resources Title’s website at resourcestitle.com.
ATTORNEY FEES
We always advise our clients work with a local real estate attorney when purchasing a property or leasing a commercial property.
Although it is not required, legal representation is strongly advised. A client may be unaware of significant considerations which may be of great legal and financial interest. Real estate agents are permitted by law to complete a blank purchase agreement. This would be for residential properties of four units or less and residential lease contracts. They are not able to create a commercial sale or lease agreement.
Clients have three business days after both parties have signed to have an attorney approve or disapprove of the contract. This provides adequate legal protection for all principals.
Neither title company representatives, real estate agents nor loan officers may provide legal advice. Given the significant financial considerations, having legal representation is highly advisable.
Most real estate attorneys charge a flat fee for the transaction. You can estimate your expense accurately upfront.
INVESTMENT PROPERTY CONSIDERATIONS
Not everyone who is a buyer is looking to occupy the property and there are great investment opportunities for those who wish to build their portfolio for passive income.
But there are many considerations and potential pitfalls which an investor needs to know about. Learn more at our Website.
MORE ABOUT MORTGAGES
Not only is mortgage financing complicated, it is ever-changing as economics and legislation impact how it is offered and the requirements of the buyer.
Learn more at our website.