- The Washington Times - Friday, February 13, 2009

Last week’s guide for first-time homebuyers focused on determining how much to spend when buying a home and arranging financing. However, first-time homebuyers also need to be particularly careful of where they buy and what they buy to make sure the property will hold onto its value in a rocky housing market.

After meeting with a lender, obtaining a preapproval letter and developing a budget for the home purchase, buyers should be ready to meet again with their Realtor to begin narrowing home choices. After looking at the budget, the buyers and their Realtor should discuss the preferences and priorities of the buyers.

“First the buyers should decide if they want to live in a condominium, town home or single-family home, which will depend on their family size and their budget,” says Christine McGuinness, a Realtor with Weichert, Realtors in the District. “Some of the other issues that will influence their decision are whether they need to be near public transportation, have school-age children and have one or two cars they need to park. Lifestyle questions that need to be considered are whether they like trees or concrete, a suburban or an urban location.”

Realtors are not allowed to “steer” buyers to particular neighborhoods because of Fair Housing laws, but they can direct the buyers to places where they can find information about school test scores, crime reports and other neighborhood information.

“I suggest several neighborhoods to buyers that, based on their price range and the parameters, they might want to consider,” says Barbara Miles, an associate broker with Coldwell Banker Residential Brokerage in Bethesda. “I recommend that the buyers drive around these neighborhoods in the early evening and on the weekends to get a feel for who lives there and what the neighborhood is like.”

While commuting distance and schools tend to be the most important issues to most buyers, first-time buyers also are concerned about the potential decrease or increase in a home’s value. While no one can accurately predict when homes will increase in value or by how much, Realtors can research a neighborhood and provide historical statistics that can reveal how well a community has fared during the economic downturn.

“Knowledgeable agents can provide information about planned developments, which can also impact a home’s future value,” says Ms. McGuinness. “We can check to see how many short sales or foreclosures are on the market in a particular community. An area with a lot of foreclosures may take a longer time to regain its value.”

First-time buyers interested in purchasing a foreclosure or short sale will need to be prepared with plenty of patience, since these types of sales can take months to complete. Foreclosures are always sold “as is,” so buyers need to be prepared for the possibility of significant repair work when they move into the home. Buyers of foreclosures may have a home inspection before they complete the sale, but this would be only to get an estimate of the required work to be done. The owner (in this case, the lender) would not make any necessary repairs. Some foreclosures are in good condition, but others have been damaged by the previous owners and may be missing appliances, light fixtures and even kitchen cabinets.

“FHA (Federal Housing Administration) offers a loan program that adds up to $35,000 to the price of the home so that buyers can purchase a home and make improvements,” says Paul Defngin, a mortgage consultant with Nationwide Home Mortgage Inc. in Rockville.

Some first-time homebuyers assume they can make a low offer in this buyer’s market, but this will not always work. While buyers may feel that there’s no harm in trying out a low offer, the danger is that the seller will be insulted and will not negotiate with those buyers at all. If the buyers love the house, this can be extremely disappointing. To determine what to offer, the buyer’s agent will research recent sales of comparable homes, looking in particular at the sales price versus the initial asking price.

“If a buyer really wants to make a low offer, I have to present it, but I let them know that a ridiculously low offer may just be thrown out by the seller,” says Ms. Miles. “It’s important to look at how long something has been on the market, because sellers are less likely to reject an offer outright if their home has been on the market for 120 days or more.”

Along with their purchase offer, buyers need to provide an “earnest money deposit,” funds that will be held in escrow until the settlement date, when they are applied against the required down payment. Earnest money deposits vary widely from 1 to 5 percent of the home price, and how much to deposit depends on a variety of factors. If the buyers are competing with other buyers and want to make sure their offer is accepted, they should offer the highest possible earnest money deposit. This deposit proves to the sellers that the buyers are serious about buying their home.

The period of time between the acceptance of the offer by the seller, a “ratified contract” and the settlement date is critical for buyers, who need to take several steps the moment their offer is accepted. First, they need to get in touch with the lender so that the appraisal of the home can be ordered and the loan approval process can be completed in time for the settlement.

Next, buyers need to arrange for a home inspection so that they can get an idea of the condition of their home and decide if there are items that they want the sellers to repair or replace before settlement. The sellers can negotiate these items, and the buyers, if they have made the contract contingent on a satisfactory home inspection, also have the option of canceling the contract. The home inspection offers an opportunity for buyers to estimate how much they may need to spend on future home maintenance and improvement projects.

“The most important thing that buyers need to know is that they should not buy anything between ratification and settlement because the loan approval could be pulled if their credit score drops,” says Ms. Miles.

Buyers need to arrange for homeowners insurance. Ms. Miles recommends starting by getting an estimate from the buyers’ auto insurance company since many companies offer discounts for multiple policies.

Realtors will recommend three title companies to the buyers, who are the ones to choose the title company for the settlement. Buyers should stay in close touch with their lender and Realtor prior to the settlement date to make sure everything is proceeding smoothly. The lender will provide a Good Faith Estimate of the funds needed by the buyers at settlement.

At the settlement, buyers should be prepared with their down payment and closing costs in certified funds, along with a checkbook in case they need to provide a little bit more than the estimated cash.

In today’s market, many buyers can negotiate so that the sellers pay some (or all) of the closing costs. Some lenders will only allow seller contributions up to a certain limit.

Once the papers are signed and the keys are handed to the buyers, they can get started moving into their new home.

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