Potential Home

1. Look at your personal financial position. Seek out professional advice as to how much you can really afford.

2. Begin house-hunting. Start with a wide geographic area and then focus your attention on the area that most interests you.

4. Hire an attorney to review the contract and have an engineer inspect the home.

1. Shortage of Available Rental Housing: One common comment you will hear from anyone who has looked for an apartment recently is that there is very little to choose from and what’s worse, the monthly charges are unrealistic. Not being happy with what can be rented is a strong motivation to move into an ownership position.

2. Shortage of Land: Vacant land is impossible to find. Additional housing stock can only be added to the marketplace through spot building or acquiring and then demolishing existing structures. Both approaches add substantially to development costs. Inside the city limits you have government intervention, through the rent stabilization laws, acting as another disincentive to develop more rental stock. It also has the additional negative effect of encouraging residents in apartments that are too large for their needs to stay in them because their current rent is being kept artificially low. In a free market rent environment empty nesters would find it cost effective to downsize, since it would mean lower housing costs. Under rent stabilization, staying where you are is more cost effective.

3. Tax benefits: For those individuals that have come to the area based on the salary they are being offered, tax benefits become very important. Because we are in an area with a high cost of living, salaries need to be high to attract qualified people. This obviously puts them into a high tax bracket. The tax benefits of ownership then become very valuable.

4. Stability: People reach a point in their lives when they begin to seek stability of where they live. It could be because they are tired of rent increases or because they are starting a family and are seeking a secure place to live. Whatever the reason, stability plays a major role in the home buying decision.

5. Safety of the investment: People, in general, have short memories. When the real estate market softened in the late Eighties many were afraid to invest in real estate. After all, real estate prices never go down but that was exactly what happened. Now we’ve entered the new millennium. The stock market replaced real estate as the “perfect investment”. Stock prices can only go up, becomes the popular belief. Reality sets in. Investors found themselves losing money by the day. The “perfect investment” proved to be nothing more than an illusion. People started to look for safer investments. Area real estate values have been appreciating at a steady rate of 10% to 15% a year depending on the area. Real Estate quickly became the next “perfect investment’. Today the Real Estate market is following the same downhill slide that the stock market took.

6. Wealth effect: People who own property historically have felt rich. They proudly boast about what their homes are worth to the friends that are renting. Regardless of how inflated their estimates were, they looked like they have made a very smart investment. Whether it is the power of suggestion or the “keeping up with the Jones” syndrome, their friends become motivated to buy. This effect isn’t nearly as strong today as it has been in the past but it is still there to a limited degree. Once the market rebounds, this will again be a component in the homebuyer’s motivation.

Today’s market conditions create a level of fear in the buying decision. How much will prices fall? Will mortgage interest rates fall? Am I buying too soon or am I waiting too long?

When housing prices were going up everyday, the common comment I would receive from potential clients was, “I wish prices would come down so I can buy the house I want.” Be careful what you wish for. Deciding to buy when prices have come down is a more complicated decision then buying when they are appreciating. Now I hear, “I’m afraid to buy, prices may keep falling.”

Every time you use credit or apply for credit, the credit bureaus are notified. There are 3 credit bureaus (Equifax, Experian and Trans Union). Most creditors report to all three bureaus but some don’t. This is why when you apply for a mortgage all 3 bureaus are contacted. You should also keep in mind that it can take of up to 90 days from the time you use your credit, or pay down your outstanding balance, to the time it is actually reported to the bureaus.

Reviewing credit reports has always been very subjective. Each individual underwriter draws off his or her own experience in deciding the creditworthiness of an applicant. Each lender develops its own set of standards for mortgage products for their underwriters to work with. This combination leads to a certain amount of inconsistency in deciding the creditworthiness of applicants with similar credit profiles.

Fair, Isaac Company, based in California, attacked this problem in the late 1980’s. They studied millions of credit files, looking for patterns that could accurately predict potential default rates. Once these patterns were identified, a mathematical model was developed that was capable of predicting the probability of an applicant defaulting on a loan. The intention was to take the human element out of the decision process. The program that they wrote was then incorporated, with minor modifications, into each of the 3 bureaus. This enabled the bureaus to assign a credit score associated with an applicant. Equifax issues a Beacon Score, Experian a FICO Score and Trans Union an Empirica Score. Since the data reported to each bureau is slightly different, the scores will also be different. Most lenders will use the middle value in determining the score used to evaluate the applicant.

The actual formula for calculating a credit score is a trade secret and the statistical modeling that the formula is derived from is constantly being revised. There is, however, some general information that has become available over the years.

Your credit score is developed from a sampling of the data in your report. This means two things. First, having a longer credit report is better than having a short report. A late payment on one credit card when there are only 3 pieces of information on your report is going to have a greater impact that if you have 20 pieces of credit on your report. Second, reports run within weeks of each other, with no apparent differences in how credit has been utilized, can yield different scores. Different samplings of data can yield different scores.

Your “Score” is a number between 300 and 850. The higher the number, the better a credit risk you are. A score below 680 is generally a cause for concern for a lender and in this credit environment a score below 720 will trigger a pricing adjustment. As a score decreases, the pricing adjustment gets worse. Should the score fall below 620 it becomes a serious issue. An applicant at this level will be limited not only in the types of mortgage products available but will be required to put a higher down payment on the purchase. Anything below 580 generally is too low for any type of credit. Because of all the research done on patterns of consumer defaults, the lending industry has been able to create a sliding scale of interest rates. Instead of simply approving or declining an application, a lender now has the ability to price a mortgage based on the probability of default. This is called “risked based pricing”.

A loan is considered delinquent if the borrower has fallen behind on his payments for 90 days or greater. An applicant with a score below 600 has a 1 in 8 chance that he will become delinquent in at least one of his outstanding loans. As the score moves to 659 the odds fall to a 1 in 26 chance, from 660 to 679 it drops to 1 in 38, from 680 to 699 it's 1 in 55, from 700 to 719 it's at 1 in 123, from 720 to 759 it's at 1 in 323, from 760 to 799 it's at 1 in 597 and at 800 and above it falls to a 1 in 1,292 chance. These odds are only approximate and they are constantly being revised. Loans age and the economic conditions of the country change over time. New data is constantly being added to the computer model to reflect these changes.

The credit score is based on approximately 45 different criteria from your credit profile. The most important component is how you currently pay your bills. This represents approximately 35% of your score. Your most recent history carries the most weight here. Recent minor late payments can easily have a greater impact than severe credit problems in the past. For example, the common assumption that you need to wait 7 years after a bankruptcy before you can be considered for a mortgage is simply not true. The discharge need only be 2 years ago as long as you have properly re-established credit. You will pay no higher an interest rate than if the bankruptcy never occurred.

The second most important component is your credit utilization. How you utilize your existing credit impacts roughly 30% of your score. The closer you are to your credit limits on your credit cards, credit lines, etc, the greater the chances you have of having financial difficulties. Knowing this, you are in a stronger financial position to distribute your debt over several cards, instead of focusing on one credit card with a high balance.

Many people are afraid to have too many credit cards. They feel that having the credit available is too large a temptation. They will maintain only one card and keep a balance on it. The only danger in this approach is that should there be any minor problems in paying the monthly payment, it ends up having a larger than necessary impact on your credit score. A safer approach would be to have several cards, even if you only use one regularly. The more data available for your score to be based on, the more representative the score will be of the way you use your credit.

The longer the credit history you have, the better. This can impact your score by as much as 15%. Short credit histories can mean one of two things. You may simply have had no need, or want, for credit or you simply couldn’t get credit. There is no way to distinguish between these two totally different conditions. It is in your best interests to start developing a positive credit history as soon as you can. You never know when you are going to want, or need, credit in the future.

Every time you apply for credit an inquiry appears on your report. Too many inquiries can negatively impact your score. This is a misunderstood component of your score. First, the number of inquiries only contributes 10% to your score, so it’s not in itself a major component. Second, credit inquiries from non-credit issuing entities aren’t counted. So, if your insurance agent runs your credit report or your landlord does, there is no impact on your score.

If you’re shopping for a car and every dealer you talk with runs a credit report, this is counted as one inquiry. Inquiries for consumer debt dated within a 14-day period are considered one inquiry and inquiries for a mortgage within a 45-day period are considered one inquiry.

There is a common misconception that there are numerous errors on your credit report. Over the 20 years that I’ve been in this business, I’ve reviewed thousands of credit reports finding but a handful of mistakes. Anytime we find derogatory items on a credit report we discuss them with the applicant. Items that the applicant thinks, at first look, as being erroneous usually turn out to be correct after a closer investigation.

For instance, the applicant didn’t realize that the payment history of the car loan he co-signed for would appear on his credit report. This quite often is the first time the applicant sees the detailed payment history. All correspondences regarding this loan would routinely be mailed to the primary borrower. It’s not until the loan is delinquent, that the lender will contact the co-borrower.

A mysterious lender appears on the report. Upon further investigation it turns out to be a different name for a bank that the applicant was already using. Another common occurrence would be the result of one institution acquiring another. The applicant may not immediately recognize the new lender as the same lender he has been dealing with for years.

A collection account appears on the report. It turns out to be from an old medical bill that was long forgotten. Doctors and hospitals will turn over outstanding bills to a collection agency if your insurance company, or you, don’t pay them quickly enough. The collection agency may or may not follow up with you, but they will immediately report the collection account to the credit bureaus.

They know full well that you will be applying for some form of credit in the future. Their collection account will appear and you will then contact them to correct the matter. It is only a matter of time.

Do you think that doubling up on the minimum payment on this month’s Visa bill will release you of the responsibility of making the required payment next month? Unfortunately, unless the creditor is specifically instructed to do otherwise, the additional payment will be used to pay down the outstanding balance. Not making next month’s payment will result with a 30-day late notation on the account in addition to you now being obligated to pay the late charge on the account.

Do errors happen? Yes. The typical errors are due to the blending of credit data on similar named people living at the same address. A father giving his name to his son will inevitably cause the credit data to blend. Bear in mind this is only a real concern when one has good credit and the other bad. If both have good credit, even this error is meaningless.

Another typical example is when someone steals your credit card, or all your cards, and starts charging to your account. This is not as serious as it seems. Once you’ve notified the creditors as to what has happened, they will immediately alert the credit bureaus, and your file will reflect the theft.

The errors that you need to be pro-active with are situations when the creditor neglects to update your file. This is common when you pay off a collection account or a judgment. Once the creditor gets his money, he has no incentive to correct your records. You need to be sure that you get confirmation, in writing, that your bill was satisfied. Keep that along with a copy of your cancelled check and any other correspondences regarding the matter. Should the creditor not report that the account was paid to the bureaus, you will have all the necessary paperwork to prove otherwise. Your documents will supercede the data in your credit file.

It’s easy to keep your credit report accurate. If you have a product dispute with a store, do as much as you can in writing and keep copies of everything. If you have a problem with your insurance company paying a medical bill, stay on top of the problem and follow it through to the end, keeping copies of everything.

If you are contacted by a collection agency in error, have them confirm it to you in writing. If you are turned down for credit, you are entitled to receive a free copy of your credit report. Ask for it and review it, you may find out they received a report on the wrong person or you may have errors that need to be corrected. Supplying copies of the documents you kept to this creditor will prove that you are entitled to the credit you applied for.

You can routinely monitor your credit report for free. Each credit repository is required by law to supply you with a copy of your report on an annual basis for no cost. All you have to do is ask. www.annualcreditreport.com is a site that is provided free to the public. The best way to utilize this site is to visit it 3 times a year. Each time requesting you report from one of the repositories. Each repository is required to give you a copy of your report annually for no charge. By staggering your requests over the year you see your report every 4 months. This gives you the ability to address any issues on your report before they present a problem.

Eastern philosophy is based on the concept of balance. This symbol of Yin/Yang illustrates the theory. Day and night, good and evil, pleasure and pain, inner strength and physical strength are examples of opposites that need each other in order to maintain equilibrium.

The approach commonly used in personal financial planning focuses on a rigid set of rules that works well in business budgeting but fails too often when used by individuals. In developing a business plan the primary day-to-day expenses, such as rent and utilities are identified first. Then the next level of expenses are listed, and so on. Having all expenses prioritized in this manner allows for a systematic reduction of expenses when income targets are not met.

Individuals are told to do something similar. Review all personal expenditures and categorize them into two categories, “needs” and “wants”. Forming a table that would look something like this:

Needs	Wants
Rent	Vacation
Food	Dining out
Transportation Expenses	Buy a new car

After you pay for all your “needs”, you can then decide which “wants” can be fulfilled with whatever money that left after the “needs” are paid for. People fail to meet their goals with this system for several reasons.

We live in an “instant gratification” society. We’re encouraged to buy now and pay later making the distinction between “needs” and “wants” difficult.

The rigidity of partitioning all expenses in a table form is intimating requiring a level of discipline that few people have.

No expense fits neatly into either category. For example, you can pay $500.00 a month in rent or $5,000.00 a month. There’s no question that you “need” a place to live but there certainly is a “want” component in determining how expensive a place you decide to live in.

This is an effective starting point; after all you can’t reach your goal of improving your financial health without knowing your current position. From here is where the concept of balance comes into play.

Look at Yin/Yang, the black half is your “needs” and the white is the “wants”. There is fluidity in the boundary between the two halves of the circle. The “needs” and “wants” of your life not only continually cross back and forth but will straddle the boundary.

It’s only after you recognize this fluidity can you focus on understanding what you need to do and begin to implement your changes.

If you’re serious about improving you personal finances you need to acknowledge that it’s going to take time. No major change in life happens overnight. It’s also not going to be easy and mistakes will be made. Is it surprising that oriental philosophy also holds perseverance in high esteem?

Ø Check your credit card balances, are they going down, up or remaining the same.

Ø Identify realistic changes you can make in your lifestyle that will permit you to save more money.

Identify the life changes that accompany becoming a homeowner

Ø Identify the additional monthly expenses such as heat, water & sewer charges, etc.

Ø Acknowledge the fact that there will be needed capital improvements on the property at some time in the future.

Ø If the property is multifamily, the additional issues that involve being a landlord need to be addressed.

Ø If you have children or other family members living with you, identify the impact the move will have on them

Mistakes

We all learn from our mistakes but they are an expensive form of education. It’s much cheaper to learn from mistakes made by others. The following is a collection of mistakes I’ve seen. They are being presented here in the hope that you don’t repeat them.

Following other people’s advice without question. Seeking the advice of friends, relatives, co-workers, etc is good place to start when looking to do a real estate transaction. Don’t lose sight of the source of the information. These individuals will relate their personal experiences to what you are considering doing. Their situation will be different than yours. They may have no idea of how prices and procedures have changed from when they conducted their transactions or they may have nothing to contribute but feel obligated to say something. Either way, the information they provide is given with the best of intentions but will be of questionable use. How best to use this information? Use this data as the basis for the questions you will be asking the professionals. Your accountant, attorney, and broker handle real estate transactions in the normal course of business. These are the people best equipped to help.

Expecting the right advice from the experts without giving them a complete picture of what you’re doing. You know more about yourself than anyone else does. Because of this it is easy to overlook important details when talking to your professional advisors. When you’re meeting with an advisor, the advisor needs to get an accurate, overall picture of your financial position and intentions in a very short time. During the first 10 to 20 minutes of the conversation, this picture will need to be developed. To get the best information from the people you are depending on, you need to give them an accurate summary of your financial situation. Take a moment before the meeting and list all the pertinent data (anticipated changes in your income or assets, upcoming major expenses such as college, etc) that is needed to best analyze your finances. The more organized you are going into the meeting the better the quality of the information you will leave the meeting with.

Paying more attention to the questions you’re asking than the answers you’re getting. It is common to be so anxious to ask your questions that you don’t let the person answer the first before you begin to ask the second one. Due to the financial magnitude of a real estate transaction (it ranks up there as one of the most expensive transactions you will ever do in your life) the natural tendency is for your mind to rush through the thought process in an effort to absorb as much data as possible in the shortest period of time. You need to prevent this from happening. Once a question is asked, pay attention to the answer. Make sure you fully understand the answer. If you don’t, ask follow up questions until you do. Only then move onto the next question. Staying in control will also prevent the time wasting exercise of asking the same question twice.

Asking the same question twice. This is more serious than making a mistake. It tells the person you talking to that you’re not paying attention to the answers you’re receiving. This allows that person to be more causal with the answers. It you’re not paying attention, why should he bother with a detailed response? A discussion with an advisor is a two-way street. You need to be specific with your questions in order to expect the proper response. The advisor needs to answer your question in a language you understand, not “industry speak” and be prepared for a follow-up question to the response. Your responsibility is to listen to the answer, be comfortable with your understanding of the answer and then move on.

Following advice blindly. When working with any professional you need to keep in mind where they fit into the transaction. Your accountant will be advising you from a tax and affordability perspective. Your attorney will be advising you so as to eliminate any risk in doing a particular real estate transaction. The mortgage broker is focusing in on the alternate ways to finance the transaction with the associate benefits and risks of each approach. The real estate broker’s position is finding the ways to hold the deal together. Your job is to take all this data and relate it to your particular needs. All deals are arranged through a series of comprises. Only you are in the position to weigh what compromises you are willing to make to complete this transaction.

Expecting all parties involved in your transaction to perform their jobs in a professional and timely fashion. One reality of life is that no one is perfect. One reality of a real estate transaction is that there will be more than 50 individuals that will have an influence on the timing of your deal closing. Messengers, receptionists, appraisers, attorneys, processors, underwriters, title examiners, paralegals, secretaries, brokers, are just some of the many individuals that you will be depending on. Any one of these people can cause a delay in a timely closing. Don’t box yourself into a corner by depending on the closing date on the sales contract to be the same as the actual date of closing. Stay as flexible as possible and the process will be a smooth one.

Entering the housing market as if you were entering a flea market. Negotiating the sales price of a piece of real estate is not a game. You need to keep focused on the magnitude of the transaction. Haggling over the last $3,000 on a $300,000 purchase is more of a battle of egos than price negotiating. No, you shouldn’t pay more for a property than what you think it’s worth and you shouldn’t sell a property for less then you think you should get. Realistically, no one, not even an appraiser, can set the value of a property with that degree of accuracy. In this example we are discussing a price difference of 1%. Don’t let your ego cloud your judgment. Negotiate based on cold hard facts (values of homes in the area, does the house fit your family needs, etc) and not from a position of stubbornness.

Placing blame instead of finding a solution. Mistakes happen, no one is perfect. When a problem arises the natural tendency is to find out who caused the problem. Resist the temptation. People get defensive when you’re looking to place blame. Once they realize your focus is on addressing or correcting the problem, they become your best friend. Now they will do anything to help. This gets your deal closed. This is your ultimate goal. You need to keep that in mind at all times.

Getting too involved in your own transaction. This is a subtle mistake and one you won’t even realize you’re making. You need to know what’s going on with your transaction. You are entitled to confirmation that the process is moving along properly. You don’t want to call everyone involved in the transaction daily to keep tabs on them. There is a balance that you need to maintain that keeps you informed and at the same time allows people to do their jobs. Remember if they are talking to you they can’t be working on your file.

Keep asking the same question until you hear the answer you want to hear. This mistake occurs in two different ways. The first is trying to be an educated consumer and shopping for rates. Yes, doing research is the right thing to do. In your price shopping exercise you will find that most lenders are very close to each other in pricing (that is assuming the calls are made within the same day to avoid pricing differences due to market fluctuation). Then you contact a funding source that you probably never heard of before and find pricing far superior to anyone else. You’ve now found what you were looking for, a deal that can’t be beat! Anything is possible, but always remember to be cautious when finding a deal that is “too good to be true”. Chances are that you didn’t find the best deal, but came across an offer that is structured to look cheaper than it really is. Call it “smoke and mirrors”, “bait and switch”, etc but the fact remains that you should remember there “are no free rides in life”. If a deal is “to good to be true” it probably isn’t.

The second version of this mistake is asking one of your advisors the same question over and over again, with minor variations, until you trap the person into saying something they didn’t want to say. This situation usually occurs when you think you’re not getting the answer you want to hear because of a misunderstanding of the question being asked, not due to the answer not being acceptable to you. You keep changing the wording of the question, thinking it is being misunderstood, and the person you’re asking keeps rewording the answer, thinking he is not making his point clear. The end result is, both parties end the conversation with less clarity than they had before the conversation started!

All these mistakes have one thing in common. Initially you would never realize they were errors. It’s only after a closer examination of the consequences of the mistake, does the cause of the problem become evident.

Beginning the search

Ø Have a discussion with a mortgage professional to determine what price range you qualify for.

Ø Revisit the budget you developed earlier and determine the maximum mortgage you can comfortably afford.

Ø Working with the data you just put together, continue the discussion with your mortgage professional and determine a reasonable price range to work with.

Ø If you have family members that are willing to help you in your purchase now is the time to have a detailed discussion with them.

Ø Work only with those agents that respect your needs and are responsive to you.

Ø Always remember the agent is working for the seller except for those who work as a buyer’s broker and they will identify themselves as such and in writing.

Ø Don’t let them convince you that you need to work only with companies they recommend.

Finalizing the search

Ø Don’t let any one talk you into buying a more expensive house than you want.

Ø Look at properties both below and above your price range, knowledge is power.

Ø You can’t know the different feel of one architectural type from another without experiencing it for yourself.

Ø The style of the home is one more thing you need to consider when making your final compromises.

Discovering what homes have sold recently, when they sold and at what price they sold at:

Ø Ask your real estate agent to give you a list of homes that recently sold in the area, with their addresses and dates they closed.

Ø our offer needs to include sales price, contract date, down payment, time to receive your commitment and the tentative closing date.

Ø Pick your battles, keep focused on what’s important to you and don’t allow anyone to force you to accept something you don’t want

Completing the transaction

Ø A recommendation from a friend or relative is a good source, the real estate agent is not

Ø If reaching your attorney is a problem or you aren’t comfortable talking with him then hire a different attorney

Ø Tell him about any verbal promises that were made so he can confirm that they appear in the contract.

Ø Sometime after the attorney discusses the details of the transaction with you but before contracts are signed is when this is done.

Ø Be present when the inspection is done so you can have any questions answered.

Ø Find a mortgage professional that you are comfortable with and have him explain your options and his recommendations.

Ø Don’t feel compelled to use the real estate office or anyone they recommend.

Ø Understand the lender is investing a large sum of money in you; they need to be sure you are going to live up to your obligation to pay them back.

Ø Don’t take the process personally; the lender needs all the facts to make a good business decision.

Ø If everyone has done their job properly there should be no issues that need to be addressed at this time.