Home Buying Power

by Marti Kilby

  When evaluating quotes, price is not the only consideration. It is a good idea to inquire about the company’s rating, as this reflects their financial strength. Ratings go from A+++, which is superior, down to a D-, which is poor. Obviously, if you have a claim, you want to make sure the company is financially strong enough to pay your claim, so a higher rating is preferable. You may also want to search for comments from customers about their claims experience, especially how long it took for claims to be processed and payments received. Additionally, if you will not be paying through an impound account, be sure to inquire as to what type of payments are available, as some companies do not offer monthly payments and require you to pay in one annual or two semi-annual payments.

  Flood Insurance

  You may also want to consider flood insurance offered through the National Flood Insurance Program (NFIP), which is run by the Federal Emergency Management Agency (FEMA). As noted earlier, water damage from a burst pipe is covered in your homeowner’s insurance, but flooding from storms and hurricanes or dam inundation is not. Flood insurance is based on the replacement cost for your home’s structure and actual cash value for personal property.

  During the inspection period of your purchase transaction, you will receive many disclosures, including a Natural Hazard Disclosure Report, as noted in Chapter 15. This report will reveal whether or not you are in a flood zone. It should be noted, however, that even if the property you are buying is outside a zone on a flood map, over 20% of flood insurance claims are filed in areas of low to moderate flood risk.

  Flood insurance policies are written by over 100 insurance companies who participate in the NFIP, so getting a quote is easy. It should be noted that after a policy is written and paid for, there is a 30-day waiting period before it goes into effect. In case of a flood, those who are uninsured may be eligible for low-rate loans if the area is declared a Presidential disaster area. The disadvantage, of course, is that loans must be repaid, whereas with insurance you are simply paid according to your claim. More information is available at FEMA: www.floodsmart.gov.

  Earthquake Insurance

  The thing that makes earthquakes so scary is they are pretty much unpredictable. Although science has made great strides in the last 20 years in terms of identifying potential stress points that may trigger a quake, predicting an earthquake isn’t like looking at a map and plotting the course of a hurricane or a swollen river. Earthquakes arrive with little to no warning, and as we have witnessed, can cause massive destruction of property.

  What many people don’t understand is that no matter where you live in the US, damage from an earthquake is not covered by your homeowner’s insurance policy. Earthquake insurance is a separate policy, similar to flood insurance. In California, earthquake insurance is issued by the California Earthquake Authority (CEA). What might surprise you is, despite California’s earthquake history, fewer than 12% of homeowners have earthquake insurance.

  In the past, few people had earthquake insurance because of the high 15% deductible. With homeowner’s insurance, your deductible is a flat amount, such as $2,500, but with earthquake insurance, your deductible is a percentage of your home’s value. A 15% deductible on a home valued at $600,000 would be $90,000! That is a lot to spend before your insurance kicks in. Today in California, there are options for policies that have deductibles as low as 5%, and as high as 25%, which you can explore at the California Earthquake Authority: http://www.earthquakeauthority.com.

  Should you consider earthquake insurance? The answer might depend on where your home is located. As noted earlier, during your inspection period, you will receive a Natural Hazard Disclosure Report, which, in addition to showing whether or not your home is in a flood zone, will show your proximity to earthquake faults. Depending on your home’s proximity to a fault, the cost of your home, and your financial resources, earthquake insurance might be a wise choice.

  Savvy Shopper Tips: Do shop around for your insurance, as there is often a difference in premiums between companies of several hundred dollars a year for the same coverage. Check the limits on what is covered for jewelry and other valuables, and insure those items on a separate schedule with a rider. Do check on proximity to flood or earthquake zones, and make sure you are adequately protected.

  Chapter 18

  When You Should and Shouldn’t Purchase a Home Warranty

  Homes operate as a complex network of systems and appliances. When everything works as it should, your home operates smoothly and you really don’t think about the complicated nature of everything going on behind your walls. But when the shower won’t turn off, or the furnace fails to provide heat, your world turns upside down. Not only are these failures inconvenient, they can be very costly to repair or replace.

  What Does a Home Warranty Cover?

  Home warranties are not the same as homeowner’s insurance, which provides coverage for fire, theft, and other hazards. Home warranties are basically a service contract that pays for the repair or replacement of certain components within your home that fail because of malfunction and normal wear and tear. Most basic warranties cover electrical, heating, and duct work as well as plumbing, kitchen appliances (except refrigerators), and exhaust fans for a period of one year. The cost for a basic policy is $300-$500 for a single-family home, and slightly less for a condo. For an additional $100-$250 per item, there is additional extended coverage available for A/C, pools, refrigerators, washers and dryers, and even roof leaks, among other items. Warranties for larger homes can cost up to $1,000. Warranty terms are generally one year, with some offering 13 months of coverage.

  Do I Really Need One?

  Whether you should buy coverage or not depends on a few factors. For instance, if you are purchasing a brand new home, the builder will provide at least a one-year warranty for home systems and appliances, and generally ten years for structural issues. If your home comes with appliances, those will additionally have manufacturer’s warranties.

  On the other hand, if you are purchasing a resale home, it may be a good idea to purchase a warranty, or ask the seller to provide one as part of your negotiation. This could be especially important if you are a first-time buyer sinking all of your money into the down payment—you could end up in a precarious financial position if faced with an expensive repair in your first year of ownership. Often, your real estate agent will pay for the home warranty as a way to thank you for your business. A home warranty purchased by the seller before the house is even sold can be an attractive incentive to prospective buyers, as the warranty will transfer to them upon closing.

  As with any contract, the key is to carefully read the information and be aware of exactly what is covered and what is not. For instance, roots in a sewer line are not covered, nor are appliances that were installed incorrectly. Also, be aware there will always be a service call fee of $50-$75, and you cannot use the repair company of your choice. If you have an appliance or system failure and you think it will be covered, call your home warranty company right away before calling an outside technician or trying to repair it yourself, as these actions might invalidate any claim you could otherwise make.

  Before we wrap up our discussion on home warranties, I’d like to share another personal story.

  My husband and I actually had an interesting experience with a home warranty the seller had purchased for us on a home we bought back in 2001. Shortly after moving in, we had a heat wave and turned on the A/C, which had worked fine during the inspection. It ran for about an hour cooling the home, and then it stopped blowing cold air and just ran like a fan. We contacted the home warranty company, and they sent out a repair person the next day. After a thorough inspection, the repair person determined that the A/C unit was so old it really wasn’t worth repairing, and our warranty company authorized the replacement of the unit. We were, of course, very happy we had that warranty!

  If you will be purchasing a warranty, or asking for one, it is wise to do some online research to explore the
different warranties available; what they cover, exclusions, limitations, costs, and reviews from actual customers. Doing your homework before purchasing a home warranty could provide not only peace of mind, but also save you money and headaches down the road.

  Savvy Shopper Tips: A home warranty may be advisable if you are purchasing a resale home. Ask for a warranty to be included when you write your purchase offer. If purchasing a warranty yourself, be sure to shop around and do read customer reviews. Some home warranty companies can be quick to sell you a policy but a nightmare when you go to file a claim. If the appliances are newer, it might be a waste of money to pay for an upgraded warranty that includes appliances, such as a refrigerator or washer and dryer that may already be covered by a transferable manufacturer’s warranty.

  Chapter 19

  Just Sign Here: Understanding Your Loan Documents

  When I first started in real estate back in 2005, I worked as a loan officer in what was certainly the most corrupt period for lending in our lifetime. Abuses and greed were rampant, as banks and mortgage bankers kept reducing the qualifications necessary to get a home loan. This was very evident in San Diego, where some unscrupulous mortgage brokers preyed upon our large Spanish-speaking population and talked them into signing documents they could not read, for loans they could never afford. Even English speakers were at a loss to understand the intricacies of a negative amortization loan and what that really meant in the long term. The almost non-existent qualification requirements, inflated loan amounts, and crazy terms were so unrealistic that many borrowers were doomed to foreclosure or a short sale before the ink had even dried on the loan docs. I also knew of appraisers who would willingly inflate property values, allowing homeowners to drain imaginary equity from their homes. The inevitable burst of the housing bubble threw our country into the Great Recession and devastated the housing market. For those of us in the business, it was a very bumpy road.

  As of this writing, it is a much safer environment for today’s borrowers. We saw the tightening of lending guidelines, changes in how appraisals are ordered, and the birth of the Consumer Financial Protection Bureau. While it is always important to read what you are signing, your chances of getting a loan you don’t understand are greatly reduced in today’s market.

  The time is finally here—you’re really buying a home and it’s time to sign the loan documents. The notary opens a folder, and you gasp as you see a pile of papers the size of a small phone book. What the heck are you signing, and how can you possibly read through all of these pages and feel confident that you’re not giving away your first-born child?

  The Documents You’ll Be Signing

  The good news is that if you and your lender have both done your jobs, there will be no surprises. From the very beginning of the application process, your lender is required to deliver certain documents to you within three days of receiving your application—their job is to deliver the documents, your job is to read them carefully and ask questions. The loan estimate you receive at that time shows your loan amount, interest rate, term, line-item fees, and the cash you need to close the transaction. If you originally did a pre-approval before opening escrow, the estimate will be changed based on the final sales price and terms of the purchase.

  You will have another opportunity to review your loan three days prior to closing escrow, when the lender is required to provide a Closing Disclosure (CD). This disclosure is very similar to the loan estimate and will again show your loan amount, interest rate, term, line-item fees, and the cash you need to close the transaction. The CD is delivered to you and signed just before loan docs are drawn by the lender and sent to escrow. This provides you, the borrower, with one final opportunity to review the numbers before committing to the loan.

  So, when you see that big stack of papers, there should be no surprises. Here are the main documents you’ll be signing:

  The Note—The promissory note is your promise to repay the loan and the accrued interest. It will show the loan amount, term, interest rate, due date, date of first payment, where to pay, and penalties for late payment.

  Mortgage or Deed of Trust—Whether you sign a mortgage or a deed of trust depends on where the property is located. In California, a deed of trust is most commonly used. Both documents establish your home as collateral to protect the lender’s interests in case you stop making payments. A mortgage is an agreement between the lender and the borrower. A deed of trust also includes a third-party trustee, often a title company, who acts as a representative of the lender in case of foreclosure. Another difference between the two documents is that in case of foreclosure, the trustee can expedite the sale of the property, whereas if there is a mortgage, a judicial proceeding is usually required.

  The Deed—This document officially transfers ownership of the property from the seller to the buyer. The deed is recorded with the County Recorder’s Office, providing public evidence of the sale and the transfer of ownership.

  HUD-1—This is a standard real estate settlement form that is used throughout the country. It itemizes all the charges and credits associated with the transaction. You will receive a HUD-1 three days prior to closing, and then a final certified copy after escrow closes. The final HUD-1 is an important document to retain, as there are certain closing costs that are tax deductible.

  Depending on the type of loan, you may also be signing an affidavit that you will be occupying the property. This is likely if you have a VA or FHA loan. If you have an adjustable-rate loan, you will also sign an additional document outlining the adjustments and terms of the loan. Another document is also signed if you are setting up an escrow account to pay your insurance and property taxes on a monthly basis along with your mortgage payment. The most important thing to do when signing is to make certain that the loan amount, interest rate, and all other terms match what was previously disclosed. It is also important that you bring your driver’s license or passport to the signing as identification for the notary.

  What Happens After You Sign?

  What happens next will vary from state to state. After signing in California, the notary will return all the paperwork to the escrow company. Once the documents are inspected for accuracy and completeness, they are returned to the lender, who will also inspect the documents. If anything is lacking or inaccurate in the lender’s loan package, the underwriter may issue funding conditions that must be satisfied before they will fund the loan.

  Once all conditions are met and the lender is satisfied, the loan will be funded and the money is wired. At this time, if you have not already done so, your down payment is also wired. Upon receipt of all monies, escrow will arrange for the title insurance company to have the sale recorded. Once you have confirmation of recording, it’s time to break out the champagne. Congratulations! You just became a homeowner!

  Savvy Shopper Tips: Make sure you understand and agree with all the terms of your loan before loan docs are drawn. Wire the balance of your down payment to escrow two business days before closing to ensure that closing is not delayed. If paying by check, make sure to deposit well in advance in order to allow time to clear. When reviewing the loan documents, the promissory note, and the deed, make sure your name and the property address are spelled correctly. Also, ask that your loan officer be available to accept your phone call in case you have questions during signing.

  Chapter 20

  Countdown to Closing

  You’re almost there! In just a few days, you’ll own your new home! Here are a few things to take care of during this exciting week:

  Sign loan docs and deposit the balance of your down payment to escrow.

  With your agent, do a final walk-through on the property. The purpose of this walk-through is to determine that the property is in relatively the same condition as when you viewed it previously. Specifically, you want to make sure there has been no vandalism, and if the seller has agreed to make repairs, they have been satisfactorily completed.

  Arrange to have utilities s
witched to your name. It is a good idea to coordinate with the seller so there is some overlap and no chance that you might be without services. In addition to energy utilities, water, and cable, make sure you find out about trash collection. In some areas, it is managed by the city, while in others, there are private companies who provide collection services.

  Submit a change of address to the post office.

  Make arrangements for any cleaning or painting or other projects you want to complete prior to moving in.

  If moving in soon, confirm with your moving company or truck rental agency.

  Make arrangements with your agent to collect your keys and any “clickers” (garage openers, etc.) after closing.

  Although not as time sensitive, many buyers forget to notify various agencies of their move. Remember to update your voter registration, notify the Department of Motor Vehicles of your address change, and provide your new address to your auto insurance agent. A change of location may mean an adjustment in rate.