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Buying FAQ

Should I Buy or Sell First?

Generally speaking, it makes sense to put your present home on the market first, then buy.  That’s because it can be very frustrating to find your dream home, just to lose it because you can’t sell your present home quickly enough.  Lots of factors affect this decision, however; for instance, if it is a seller’s market, then it will probably behoove you to identify your replacement home first.  That’s also true if what you’re looking for is unique or hard to find.

Most sellers will expect you to be pre-approved, and (again, depending on the market), contingency free.  That’s especially true with short sales, foreclosures, and new construction (but, not always).  In some cases, financing can be arranged to enable you to buy first, then sell (bridge financing).

Your Liz Moore agent can help you sort out these answers, and help you make the best decision for your situation.  They can explain how contingencies work (conditioning your new home purchase on your current home selling and closing), help you evaluate financing choices, and lay out your options.

I'm Ready to Buy a Home...What's the First Step?

Ideally, the first step when you’re ready to buy a home is to meet with a REALTOR for what we refer to as a “buyer counseling” session.  During that meeting, the REALTOR will ask you to describe your wish list for your new home – everything from the number of bedrooms and bathrooms that you want, to the type of neighborhood and amenities, to specific features in the property.

Next, they will arrange a meeting with a mortgage lender, to discuss what type of financing will be best for your purchase.  The lender will help you understand how much cash will be required for the purchase (down payment, closing costs, etc.), and what kind of payments you can expect in different price ranges.

Getting pre-approved for a mortgage is important for several reasons.  In the current financial climate, sellers expect that a “pre-approval letter” will accompany your offer to purchase, to establish your creditworthiness.  Even more importantly, understanding your borrowing power before you start looking for a home will help you set realistic parameters for your home search.

When you’re ready, we can connect you with the right REALTOR and the right local mortgage lender.

How Do I Select the Best Lender?

Although this may sound like a self-serving answer, the best way to be certain that you are selecting the right mortgage lender is to ask your real estate agent.  Agents work with a variety of different lenders from a plethora of different banks, brokerages, and mortgage companies, and they have a good feel for who offers the widest array of products (or at least products that may best fit your needs), who offers the best service, and who has the most competitive pricing.

It can be very difficult for a consumer to compare loans from two different lenders, because there are so many moving parts – interest rate, APR, term, origination costs, loan commitment/lock in fees, mortgage insurance, different down payment requirements, etc.

Ideally, you want to meet with a lender who will assess your current situation, and will recommend several different financing options/strategies that best suit your needs.  Your Liz Moore agent can help you compare programs, as well as introducing you to local lenders who do a great job.

What is title insurance and why do I need it?

For most people, their home is their largest investment, and they want to make sure that investment is as safe as money in an insured bank vault.  So, in order to protect your investment in your home, the settlement agent will search local courthouse records to make sure the seller can convey clear and marketable title to you.  They look for judgments, tax liens, lawsuits, and other title problems – and make sure the transaction doesn’t close until everything is clear.

While a title search should uncover problems of record in the courthouse, and a survey should uncover matters on the ground that does not guarantee there won’t be title problems.  For example, courthouse records will not reveal forgery, fraud, unknown heirs, lost wills, etc.  For this reason, lenders require that their security interest in your house be protected with title insurance.  Title insurance is just like any other type of insurance except that it insures against title problems.

The lender’s policy does not give YOU any protection.  At closing, you will be given the opportunity to purchase an owner’s title insurance policy, which would protect YOU, for a reasonable one-time fee.

What happens if the appraisal comes in low?

In a fast moving real estate market, it is not uncommon to run into appraisal issues.  Especially when markets are in flux, shifting from a buyers’ market to a sellers’ market, the appraisers are challenged to keep up with rising values.  Add to that a conservative lending environment, which places very strict guidelines on the appraisal process, and that can be a recipe for trouble.  Appraisers are required by underwriters to look “backward” for their comparable sales (the 3 most comparable sales in the past 90-180 days, for instance), and pending sales and active inventory that may be priced higher can only be used as a compensating factor.

If you are getting financing, an appraisal will be required to determine what we call the “loan-to-value” ratio.  That is the reason that a low appraisal can be a problem, as it means that the borrower will have to put down additional funds, in order to keep the loan to value ratio in line.  In order to protect the buyer, most contracts have language that makes the sale contingent on a favorable appraisal.  If the appraisal comes in below the sales price, then the buyer has the option of terminating the contract and having his earnest money returned.
There are, however, other options.
  • You can put down additional funds toward the down payment, and effectively pay above the appraised value.  This would rarely be advisable, but in some cases with a unique property, the buyer may want the home for personal reasons regardless of market value.
  • You can appeal the appraisal.  Appraisals are part art and part science, and it’s important for buyers to understand that.  Each appraiser selects comparable sales and makes adjustments based on his perspective, and a case can often be made for using different comparable sales and/or making different adjustments.  The appeal process can be time consuming and complex, and so you should definitely consult with your Liz Moore agent and lender before heading down that path.
  • The most common response to a low appraisal is that both buyer and seller return to the negotiating table.  Sometimes the seller will lower the sales price to the appraised value, and sometimes – if there are extenuating circumstances,  the buyer may agree to a compromise in either the sales price or terms of the agreement.
 
Do I Need a Home Inspection?

We understand that it would be thrilling to discover a perfect homeUnfortunately, perfect homes do not exist. In fact, even brand new homesare not perfect. That’s why your Liz Moore agent will make arrangementsfor a thorough inspection of the home after your offer to purchase theproperty has been accepted. (As long as this contingency was negotiated inyour purchase offer.)

The primary purpose of a home inspection is to perform a visual inspection of the readily accessible areas and components of the home and report on the condition of major systems, visible structural components and other operational components of the home. This information provides you the knowledge to make a well informed decision regarding the overall condition of the potential investment.

Although an in-depth visual inspection will be performed and a report on hundreds of items will be produced, a home inspection is not technically exhaustive. It is not designed to report on cosmetic issues, find every defect that may exist, nor does it replace your opportunity to perform a “final

walk-through” prior to closing. Your presence during the home inspection is encouraged, as this is your

greatest opportunity to learn about the overall condition of your home.  Your home inspection report will be presented to you at the end of the home inspection. This will allow you and your Liz Moore agent to move forward with the real estate transaction in an expeditious manner. The cost of the home inspection is based on the square footage of the property being inspected.

Should I look at short sales?

That depends.  Short sales are definitely a “different animal” than normal resale or new construction listings, and it’s important that you are prepared for the process.

Let’s begin with “What is a Short Sale?”  Lenders that loan money secured by a lien against real estate have a right to require that loan to be paid in full before they release the lien, which is typically paid out of the proceeds of a sale of the property.  A “short sale” then is a sale where the proceeds (the sales price) is insufficient to pay the loan in full, and the lender agrees to release the lien for less than the full payoff of the loan.  Lenders might agree to do this when the seller must sell the house (hardship or otherwise) or foreclosure is imminent or likely, and the current value of the house does not support a sales price high enough to pay the loan in full.

So, what are the disadvantages to the buyer of a short sale purchase?  First of all, since lenders are not obligated to agree to accept less than the full amount necessary to pay their loan, there is always a chance that the deal will fall through at the last minute.  That uncertainty is not something that all buyers are willing to deal with.

The second major downside to purchasing a short sale is that there is little to no control over timing, again because you are waiting for the lender to approve the contract.  Do not make firm plans (hiring movers, switching schools, etc.) until you have confirmation that the bank has approved the short sale.

The process can take anywhere from two weeks to six months (but normally falls in the 60-90 day range).  It depends entirely on the lender and the particular requirements associated with your transaction.  Because there is no way to predict how long it may take, short sales are not a wise option for buyers who need a firm commitment on a closing date (due to shipment of household goods, or existing lease termination, etc.).

It is important to work with a REALTOR who is familiar with, and has expertise in, the short sale process.  There are many things that can be done to protect your interest.  If you are interested in further exploring short sales, please let us know and we can connect you with an agent who can help you.

Should I look at Foreclosures?

Foreclosures, or Bank Owned properties (often referred to as “REO,” or real estate owned) can be a great investment.  The process is a bit different than with normal resale transactions, and accordingly it is important to work with an agent who is familiar with the process and can guide you through the myriad of decisions to be made.

Here are some of the primary difference between buying a foreclosure and buying a resale home:
 
  1. Because the property is owned by a bank, there is no “emotion” in the negotiations.  Most bank portfolios are managed by asset managers who are employed solely for this purpose; they make their decisions on offers based on a formula and a bottom line – not based on all the extenuating factors that often characterize a normal real estate transaction.
  2. Most banks and asset managers use their own contracts and addenda, and they are typically very seller-friendly.  In many cases, changing or amending the contract is not an option.  So, if you’re unable to live with the terms of the contract, buying a foreclosure may not be the best choice for you.  Again, it is very important that you are working with an agent who represents your interests, and can explain the agreement and addenda to you carefully before you make a decision.
  3. In today’s market, most banks and asset managers will allow a buyer to have a home inspection…BUT they will not agree to make any repairs.  So, essentially, the home inspection is for your information (and in most cases you have an option to terminate the contract if you’re not satisfied with the condition of the property as a result of the home inspection – but you must act within a tight window of time, so be sure you review these provisions carefully).  These policies can vary from one bank/investor to another, and the listing agent can generally advise on what the typical protocol is.  Another factor to consider is the overall condition of the property – because the bank will generally not make repairs, you may have challenges getting certain types of mortgage loans for the property.  Your Liz Moore REALTOR and lender can help you sort through these types of challenges.
  4. Most banks/asset managers transfer title using a special warranty deed as opposed to a general warranty deed.  It’s important that you get owners’ title insurance to protect your interest.  There are also often other provisions such as a per diem penalty for late settlements.
 
There are far too many differences to list here, so suffice it to say that it is important for you to have representation by an agent who has expertise in the bank owned/foreclosure process.  There are some good foreclosure and bank owned deals available – especially if you are willing and able to tackle some of the repairs yourself.
 
How Do I Know How Much to Offer?

Your agent can help you with a negotiating strategy.  There are a number of different factors to consider:

  • First, is it a unique property that is in high demand?  If you are going to find yourself in a bidding war, then it’s doubly important that your strategy is well thought through.  You’ll want to consider escalation clauses, etc.
  • If not, how long has the property been on the market?  Your agent can do some research in MLS to create a history for the listing and give you an idea of how long it’s been active, what kind of price reductions have been executed, etc.
  • Have there been any previous offers?  Why is the seller selling?  Sometimes, your buyer agent is able to glean information from the listing agent that will help you in determining the seller’s motivation to sell.
  • Is the listing priced well to begin with?  If so, a full price offer might make perfect sense (and, if you’re competing for the property, an offer over full price is sometimes the right step).  If the listing is overpriced, you have to really be careful, because even an offer 10% below asking may still be too much.  Rely on your buyer agent to do a thorough market analysis of the area in order to determine the best offer strategy.
  • What is the sold price to list price ratio currently in the neighborhood and the price segment?  Your agent has access to this type of data which can illuminate current market trends to help you with your decision.
 
Your agent will further protect your interests by inserting appraisal language into your offer, so that in the event the property does not appraise for the sales price, you may terminate the contract without penalty.
 
What is an Escalation Clause?

When multiple buyers are interested in the same home, one negotiating strategy is to add an “escalation clause” to the contract.  Essentially, the buyer agrees that he is willing to beat the highest offer to the seller, up to a certain amount (or “cap”), by a certain margin.  Although this can be a risky way to go, it also is a way to insure that you don’t lose out to another buyer for an amount of money which you would have been willing to pay.

How Much House Can I Afford?

What you qualify for and what you want to pay may be two entirely different numbers.  As part of the pre-approval process, a mortgage lender will assess your income and debt ratios to arrive at a loan amount for which you “qualify.”  You should trust your gut about what kind of house payment is comfortable for your family, even if it is less than what you are technically able to afford.  A common rule of thumb is that your total house payment (principal, interest, tax, insurance) should not exceed 28% of your household income, and your house payment plus other recurring debts (car payment, credit cards, etc.) should not exceed 41% of your total household income.

How Does Mortgage Insurance Work?

Mortgage insurance, sometimes referred to as PMI (private mortgage insurance) or MIP for FHA loans (mortgage insurance premiums), is really just an insurance policy provided by a mortgage insurance provider. Mortgage insurance is required on many loans when the loan amount is over 80 per cent of the value of the subject property that is being mortgaged.

You will pay a mortgage insurance premium each month, which is added into your regular mortgage payment,  until you have either gained enough equity over time so that the loan balance is 80 percent or less than the value of the property or you have paid down the loan balance to 80 percent or less of the value. In some cases lenders will also attach a seasoning requirement, meaning that you have to pay the MI for a minimum of two years.  On FHA loans, mortgage insurance is now required for the life of the loan.

When Will I Need Money During a Purchase Transaction?

When you purchase a home, there are several points during the process where you will need to bring your checkbook:

  1. At loan application.  Different lenders have different policies on up front charges, but at a minimum you should be prepared to pay an application fee, and to pay to order an appraisal and credit report.  Some lenders will defer these expenses until closing.
  2. When you make an offer.  It is customary in this market for the buyer to present an “earnest money” or “good faith” deposit with their purchase offer.  This deposit, in most cases, will be deposited once the contract is accepted, into an escrow account – and then applied to the sales price or your closing costs at settlement.  Deposits range from $500 to 10% of the sales price, with the most common deposit being $1,000.
  3. At your home inspection.  Generally speaking, the home inspection will happen within 3-10 days of your offer being accepted.  Typically, the home inspector will expect to be paid prior to performing the inspection.
  4. At closing.  The settlement company you choose will prepare a HUD statement, which is a final accounting of all the money connected to your purchase.  The bottom line on the borrower side is the amount of money you will need to bring to closing, in certified funds.
 
What Inspections are Typical in a Home Purchase?

Most purchase agreements provide for a minimum of four or five different inspections:

1.     Home Inspection, which is typically performed by an independent home inspector.  It is customary in our area for a contract to be contingent on a satisfactory home inspection, and the buyer is typically given a window of time to perform such inspection (generally anywhere from 5 to 10 days, depending on the circumstances of the negotiation).  The buyer and the seller will then generally negotiate repairs as a result of the inspection.  In some cases (such as foreclosures and bank owned inventory), properties are sold “as is” but often the buyer is allowed to perform a home inspection anyway, simply to determine the condition of the property.

2.     Termite Inspection (in some cases, coupled with a Moisture Inspection).  Most local contracts are contingent upon a termite inspection, which is typically performed by a licensed pest control company who is certified by the Commonwealth of Virginia.  The scope of these inspections can vary widely, and you should discuss the parameters with the agent that represents you.  Moisture inspections, in particular, can cover vastly different scenarios (some are limited to the subflooring and beneath, while others cover window sills, etc.).  Local markets differ in terms of who orders the inspection (buyer or seller), and the limits and caps on repairs.  This is an important part of the negotiation, and should be discussed in detail with your Liz Moore agent.

3.     Walk Through Inspection.  This is the inspection that takes place with the buyer and REALTOR several days prior to closing.  The purpose of this inspection is primarily to insure that the property is in substantially the same condition that it was at time of contract, normal wear and tear accepted.  It is also customary that the walk through serves the additional purpose of confirming that any contractually required repairs have been completed appropriately.

4.     Well and Septic Inspections.  If the property is served by an on-site well or septic tank, there are inspections to be completed to insure that water is potable and that septic tanks are functioning properly.

You can also make your contract conditional on additional inspections such as Radon, Lead Based Paint, Asbestos, Chimney, HVAC, etc.  Typically, these additional inspections are completed during the same time and contingency window as the home inspection.  Additionally, there are certain disclosures that must be made by the seller regarding Lead Based Paint if the property was built prior to 1978.  Your agent will discuss all of these options with you when you prepare your offer.

Should I order a survey?

Surveys are no longer required by all lenders as they have been in the past.  However, although they are now almost always optional, we still recommend that buyers have the settlement agent order a property survey on their behalf.  Surveys disclose any boundary line issues, setback violations, and fence or shed encroachments, and also give you a true and accurate depiction of your property.  There is a one-time minimal charge (generally around $250, unless you have acreage, which can be substantially higher).  If your property requires an elevation certificate (to determine foundation heights for flood insurance purposes), there will be an additional charge of $100 - $150.

Why Do I Have to Sign a Buyer Broker Agreement?

The short answer is that Virginia law requires it in order to protect you.

The longer answer is that having something in writing, whether it covers a single property or a months long relationship, insures that both you and your REALTOR understand exactly what’s expected from each other.

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