Purchasing a home is a very important investment that requires careful consideration. In fact, the Colorado Supreme Court has acknowledged that purchasing a home is one of the most important investments an individual can make in their lifetime, and more often than not, it is done on a limited budget. See Cosmopolitan Homes, Inc. v. Weller, 663 P.2d 1041, 1045 (Colo. 1983). Perhaps the most important reason someone chooses to purchase a house is for security.
When you rent, you are not building any equity. In real estate terms, equity is generally described as the difference between what you owe on your mortgage and the value of your property. Equity brings a sense of security because lenders are more likely to help you refinance at a lower rate, at lower monthly payments, or if you sell it means more cash in your pocket. Therefore, the more equity you have, the more secure you feel in your investment.
The decision to purchase a home is also oftentimes the first step in building wealth. However, in order to purchase a home, one must be financially secure enough to obtain financing. Even when people are approved for a certain loan amount or when they have the cash up front to make a purchase, unforeseen problems can arise. In this article, you will learn about some of the pitfalls to be wary of when buying a house.
Selling a house? Don’t worry, you may still find this article helpful, but hang in there—a follow up discussing common pitfalls to be wary of when selling a house will be forthcoming.
Failing to secure financing:
Before you start looking for a house to buy, you need to know how you are going to pay for it. Most people do not have thousands of thousands of dollars sitting in a bank account. The most important part in securing financing is keeping track of your credit score. The higher your credit score, the lower your interest rate will be. Even half of a percent difference in your interest rate can mean thousands of dollars that you will either pay or save on your mortgage. This means that if you are thinking about buying a house, you should be working hard to pay off your credit cards and other reported debts. For most people, a credit score of 650 will be enough to secure financing.
Once you have your credit score under control, you need to get pre-approved by a lender. Do not be tricked into thinking that pre-qualified is the same as pre-approved! When you are pre-qualified, the lender is guessing that you could borrow up to a certain amount. When you are pre-approved, the lender has prepared itself to loan you the money and almost always will.
When you are pre-approved, the Seller is more likely to treat you as a serious Buyer because there is less risk that the transaction will hit a financial road bump. Being pre-approved also lets you know what you can afford. You do not want to have your heart set on your dream home, only to find out that it is out of your budget.
You will also want to look into home buyers’ programs. The Colorado Housing and Finance Authority offers a grant of up to 3% of your first mortgage loan to help cover down payment and closing costs for qualified individuals. The United States Department of Agriculture offers Section 502 loans to low-income individuals with benefits such as rolling closing costs and lender fees into the loan. These are just a couple examples of programs that may help you finance your home purchase.
People who fail to secure their financing prior to shopping for a house set themselves up for failure. Many times they will not be able to purchase the house that they want because they cannot afford it, or even worse, they cannot get any financing. Other times they are rushed to get financing and end up paying thousands of dollars more in interest. Do not make the mistake of failing to secure financing prior to house shopping.
Failing to consider additional costs:
There are many additional costs of purchasing a house. Some of these costs occur during the purchase process and others occur after you have closed. For instance, you may be paying for an appraisal and survey or improvement location certificate prior to or at closing. Closing costs will include origination fees charged by lenders and title services. More than likely, you will have to pay your prorated share of taxes for the purchase year. These expenses add up quickly and can cost a few thousand dollars. Usually, your financing does not cover these costs of the transaction.
After you have bought the house, you will have to pay annual property taxes. In Colorado, the county assessor classifies and values your property and the various taxing authorities, such as county commissioners, city councils, school boards and governing boards of special districts determine the tax rates.
You will also have to pay your normal monthly bills. If you have always rented in the past, you may have never had to pay utilities before, or you may have been paying the utilities for a smaller space. Sometimes people moving from a smaller apartment into a house learn a hard lesson when they realize that it costs more to heat and cool their home. Many times people who buy a house are excited about the prospect of landscaping, but do not consider the price of a green lawn and a healthy flower bed. If you bought a house in a homeowner’s association you may not have the choice to let the grass and flowers die.
Another huge difference between renting and owning is that owners are responsible for home repairs and maintenance. When you rent and a pipe bursts or the roof leaks, you call your landlord. When you own, you are the landlord. If you cannot pay the contractor that fixes the burst pipe or leaky roof, the contractor can file mechanic’s lien with the clerk and recorder and, if the debt goes unpaid, the contractor can eventually foreclose on your home. One of the biggest mistakes people make when purchasing a house is buying a home at the top of their budget, without considering the additional costs relating to home ownership.
Failing to inspect:
When you enter into a contract to buy a house, you will have a deadline to complete an inspection of the property and to submit inspection objections. Inspection objections are items that you want the owner to fix as a prerequisite to your purchase of the house. You will also receive a document entitled Seller’s Property Disclosures. The purpose of the disclosures form is to put prospective purchasers on notice of defects in the property that the seller knows about. The seller is only required to fill out the disclosures to their current actual knowledge, not what they should know or what they could have found out if they investigated. The seller is not required to perform his or her own inspection to find any defects—that is the buyer’s responsibility. While our firm is experienced in prosecuting sellers that blatantly lie on the Seller’s Property Disclosures, it is usually difficult to prove what a seller actually knew at the time of filling out the disclosure form.
To avoid surprise problems after purchasing a property, it is essential that you hire a home inspector with a strong reputation. Over half of the states in the country require home inspectors to be licensed, certified or registered with a governmental entity in some fashion. Unfortunately, Colorado is not one of those states. Anyone can hold themselves out to be a home inspector. This means it is very important that you carefully vet your home inspector.
You want an inspector that is accredited. There are different organizations that certify home inspectors. Two of the most reputable organizations are the International Association of Certified Home Inspectors (Inter-NACHI) and the American Society of Home Inspectors (ASHI). If a home inspector is current on his or her Inter-NACHI or ASHI certifications, that inspector has passed technical exams and has the requisite training to be a member of those organizations.
You also want an inspector that will give you a detailed report. If your inspection report is only a handful of pictures stapled together, that is not detailed enough. Your inspection report should contain a detailed list purporting the state of the property and specifically identify what needs to be done to bring problem areas up to par. Without a detailed inspection report from a reputable inspector, you have not thoroughly inspected the property. Unless you thoroughly inspect a property prior to purchasing it, you will be losing an opportunity to get the problem fixed or sale price lowered.
Failing to negotiate:
Northern Colorado is certainly a seller’s market right now. In fact, most residential transactions the firm has seen in recent months involve a seller that has asked for a sale price above the appraised value or the contracted sale price has been above the asking price. Most transactions have involved bidding wars between potential buyers. Given the current real estate market, a buyer may feel like if they negotiate contract terms they may seem too needy to the seller and lose out on the deal. Do not let your fears box you into making a deal you are uncomfortable with. Buying a house is a big deal and the purchase terms should make you feel secure, not insecure.
From dates to defects, the real estate contract is meant to be negotiated. Some people make the mistake of believing that because the real estate contract is on a standard form, it cannot be negotiated. This is completely wrong. Just as the contract is a standard form, so is the counterproposal. The counterproposal form gives you the opportunity to negotiate dates and deadlines, as well as purchase price and terms. It also has a section entitled Other Changes where you can negotiate less standard terms of the contract, like requiring the seller to take the ugly blinds with them when they vacate.
You should also use your inspection report to your advantage. If the water heater has reached its lifespan, ask for a new one. If there is hail damage to the siding, ask for it to be fixed. If you submit an inspection objection and the owner rejects your request to fix defects, you can ask for a price reduction. You can also get creative. Maybe the house is not worth losing over a water heater and you really love the vintage soda vending machine in the garage, go ahead and ask for it. Negotiating is a normal part of the buying process, so do not be afraid to ask for what you want.
Jorgensen, Brownell & Pepin, P.C. is Here to Help
These are only a few of the pitfalls that buyers find themselves in when looking for a house to purchase. Hopefully, this article has given you some ideas and helpful hints to take with you in your search. The information provided is not legal advice. Every potential buyer’s situation is different, and each real estate transaction is unique. This blog is simply meant to help you think about things that may not have crossed your mind before.
If you are a buyer and have questions about a real estate transaction, the Longmont attorneys at Jorgensen, Brownell & Pepin, P.C. are here to help.