Create a Home Insurance Inventory

It is highly recommended that new home buyers compile a home insurance inventory very soon after they move into their home.  If you have been in your home for a while and haven’t done this yet; make it a priority.  Let us take a look at why it benefits you to have this list before loss occurs or disaster strikes:

• Adequate Coverage – Preparing this list is the only way to be sure you have enough personal property coverage on your home.  This is not something you want to learn after it is too late.
• Memory – In a time of crisis, it will be very upsetting and difficult to remember each and every item that was in your home.
• Claims – The insurance claim process will be sped up significantly if you have your home insurance inventory prepared and ready to submit.
• Tax Deductions – Uninsured loss is tax deductible.  If you have this list available, it will be much easier to determine this uninsured loss tax deduction come tax time.

Making a List and Keeping it Updated

There a couple of methods you can use to make your inventory list.  There are quite a few home inventory software packages out there now; many are built into home finance software. You can certainly go this route or perhaps even easier is to create your own simple spreadsheet.  For ideas of the items to put on your list, browse the internet as there are quite a few samples available.

In addition to listing each major item, be sure to record any supporting information about your items.  These could be serial numbers, brand names, appraisal values, how much you paid, etc.  You can gather this information from product manuals, receipts, and appraisals.  If the idea of transcribing all of this information into your list is leaving you overwhelmed, here is a trick.  Scan this information or better yet, take digital pictures of it all.  It costs you nothing; so simply snap pictures of those receipts and manuals.  This is certainly less time consuming than typing or scanning and you’ll immediately have a digital copy of it all.  Just make a note in the list next to the item that there is a supporting photograph with more details.

By having your home insurance inventory list on your computer, you will be more apt to update the list regularly.  When you buy something new, open up the list and type it in.  Or snap a picture of it if your camera is at the ready.

Pictures and Video

The easiest way to record all of the smaller items in your home is to take pictures and/or video.  Both are beneficial.  As we have seen pictures are a great way to get record the details of an item.  Video is a good backup as you are certainly not going to take a picture of every single item; the video will capture it all.  The video will also give you and the insurance company a better perspective with regards to the size of your items such as furniture, the size of your curio cabinet, how big your closet is, the size of your rock collection, etc.

Speaking of closets, remember to include all closets, drawers, contents of storage boxes as well as attics, and basements when taking your pictures or video.  Transfer these pictures and videos to your computer for easy access to them and be sure to back it all up.

Backing Up Your Inventory List

The final step in this process is extremely important.  That is to not only backup your inventory list and supporting pictures and video but to store a copy of that backup somewhere OTHER than your home.  Otherwise in the unfortunate event your house is destroyed, your list will be lost.  Places off site you may want to consider are a safe deposit box, at work, or at a friend or relative’s house.

Make your home insurance inventory list today.  When you have the completed list in front of you, take a few minutes to take a look at your home insurance policy.  Make sure you are adequately covered and make it a habit to review your policy every year.

Who Sets the Limits?

Fannie Mae and Freddie Mac are responsible for setting the loan limits on conventional loans.  Fannie Mae (The Federal National Mortgage Association – FNMA) and Freddie Mac (The Federal Home Loan Mortgage Corporation – FHLMC) do not provide loans directly to you; but act as “secondary lenders” which means they lend to the institutions that lend to you.

How and When are the Limits Set?

The calculation Fannie Mae and Freddie Mac uses to calculate loan limits is quite simple really.  The limits are set every October.  Fannie and Freddie first determine how much the average home price increased during the prior year.  They take a look at the current average home price and compare it to the average home price from the prior October.  A percentage increase is calculated with these two numbers.

For example:  If the average price of homes in the United States is $150,000 in October and one year later the average home price jumps to $165,000 – we know the average home price has increased by 10%.

The following year’s loan limit will simply be the current year’s amount increased by that same percentage increase we saw in the average home prices.   In our example, the following year’s limit will be ($165,000 + $16,500) or $181,500.

What are the Benefits of Conforming Loans?

When a loan follows (or “conforms”) to the guidelines set by Fannie Mae and Freddie Mac, it becomes a conforming loan.  When loans are underwritten to the same standards, lenders end up selling essentially the same loan (with perhaps a slight variation).  In Economics 101 we learned as more and more people sell the same thing; prices for that product eventually go down.  In our case, standardizing loans translates into lower rates for borrowers.

A New Sign in the Neighborhood

Let’s say you are just beginning the home buying process and have not yet hired a real estate agent to help you with your search. You drive by a house that you absolutely must see. You jot down the name and number of the real estate agent that is prominently displayed on the “for sale” sign. Hang on a second. Before you pick up the phone, read on.

An Agent’s Loyalties

Simply put, unless there is a written contact with the buyer, a real estate agent who lists a home works for the seller. To better understand why; try to imagine working for both parties with opposite interests? You can see how difficult and precarious a feat this is. Although this practice does exist (it is called dual-agency), it is uncommon and it is recommended that you do not become a party to it. The agent works for the buyer or the seller, not both.

Why You Might Not Want to See This Home Today

Back to the “for sale” sign. It may go without saying, but the name on the “for sale” sign is that of the seller’s agent, sometimes called a listing agent. This person’s primary goal is to sell the home for the owner while all along looking out for the seller’s best interests, not yours.

If you absolutely must see this house today and the listing agent agrees to show it to you, know that you will not get all the facts about the house during that first visit. The listing agent will not take the chance of revealing any information that can ultimately bring the seller a lower price for the home. There are a handful of things this agent knows but cannot tell you, including:

• The reason the property is being sold unless the seller specifically releases that information
• Any concessions the seller might be willing to make
• The substance of any conversations between the seller and the agent
• Any information that could give you, the buyer, an advantage; including a comparable market analysis
• Even if the agent knows the house is overpriced, she cannot tell you as much

Additionally, you must be very careful not to reveal too much information about your own situation to this agent. Though it may seem harmless to mention for what amount you are pre-approved or what you are willing to pay for a home (these things sneak out in conversations), the agent is obligated to pass this information on to the seller. Imagine making an offer, only to have your offer rejected because the seller knows that you are willing to pay more.

If You Must See This House Today

Ideally, you should hire your own agent, one that will represent only you, when seeing this or any other home. If you must look at it sooner, try to remain tight-lipped and know that the seller’s agent will not be telling you a complete story. Make the visit a quick one and know its purpose is only to learn if you want to pursue the home further; with your own agent of course.

Perhaps you’ve heard the story from family, friends or colleagues; their unfortunate tales of  unexpected costs and fees that surfaced in the days leading up to, or even on the day of their home closing.  You may be wondering how did your friend’s closing costs end up being so much higher than originally presented by their lender.  Will this happen to you?  Fortunately, the answer is “no.”

As of January 1, 2010, The U.S. Department of Housing and Urban Development (HUD) has adopted new rules to which mortgage lenders must adhere.  These rules were adopted to eliminate surprises at closing.

A Standardized Good Faith Estimate

Lenders have always been required to give borrowers a listing of all expected closing costs in the form of what is called a Good Faith Estimate (GFE). Before now, there was no consistency with the GFE forms.  Each lender could use its own version; presenting different information in a different manner.

Now, lenders must use a standardized, three-page form.  This form must be presented to you, at no charge, within 72 hours after you apply for a loan.  The form is very well laid out and documented in easy-to-understand terms.

The highlight of the new GFE is that it clearly spells out:

1. Charges That Cannot Increase
   There are a handful of fees that lenders are now forbidden to change.  These are the ones that they can control; such as origination fees and processing fees.
2. Charges That in Total Cannot Increase More than 10%
   Fees from third party services (selected by your lender) such as appraisals, surveys, and title insurance will not raise more than 10%. If for whatever reason, your lender exceeds these 10% tolerances, he must reimburse you.
3. Charges That Can Change
   Your initial escrow deposit, daily interest, homeowners insurance, and third party services chosen by you are not subject to the10% maximum as the lender does not have control over these factors.

The GFE must also include features of your loan that could drive up your mortgage costs at some point in the future. These might be an adjustable rate loan, balloon payments, pre-payment penalties, etc.  The dollar amount of these changes must be disclosed to you.

Trading Upfront Costs for a Lower Interest Rate

Agreeing to pay additional points in exchange for a lower interest rates and vice versa is common practice.  You will now be able to see a clear chart, called a tradeoff table, that details how this exchange will affect your monthly payments.  See exactly what your loan will look like with lower settlement charges and what it will look like with a lower interest rate.  It is all laid out right before you.

Take a look for yourself.  See a sample of HUD’S Good Faith Estimate.

A Much Improved HUD-1 Settlement Form

A “HUD-1” is the common real estate settlement form used by closing agents. The HUD-1 form itemizes all charges imposed upon a borrower and the seller of the home.  It gives both parties a complete list of their incoming and outgoing funds.  The problem with HUD-1 forms was that they bore little resemblance to the costs originally presented on the GFE.  To make things worse, these HUD-1 forms only need to be given one day before closing.  You can imagine your panic if the numbers on the form are not what you expected.

Today’s HUD-1 form is a fantastic upgrade.  A section titled “Comparison of Good Faith Estimate and HUD-1” is an extremely helpful feature.  Just as the heading states, you are able to compare line-by-line the costs on your original GFE to those on the HUD-1.  It couldn’t be clearer.  This section is broken down by those costs that cannot increase, those that can increase by 10%, and those that may increase; just as we’ve seen on the GFE.   Here is a sample of the HUD-1 form.

Mortgage Shopping Made Easier

Not only will these new guidelines and forms reduce shock on closing day but your Good Faith Estimate will serve as great tool for mortgage comparison shopping.  You can now compare apples-to-apples as you will have in hand the total cost of all fees from each lender and each lender’s GFE will have the exact same information.

Whew.  Don’t you feel better now?

Maximum Purchase Price

At the time of this writing, the maximum purchase price for conforming conventional loan ranges from $417,000 to $729,000.  This amount is updated yearly and is dependent upon the county in which the home is located.   Any loan above that amount is considered a jumbo or non-comforming conventional loan.

The maximum purchase price varies from state-to-state for an FHA loan.  At the time of this writing, the range is $271,050 – $729,750 (again, depending on the home’s location).  Typically, FHA loan limits are approximately half of what can be found in the conventional loan market.

Minimum Down Payment

Down payments range from 0 to 20% for conventional loans.   The larger your down payment, the lower your interest rate and mortgage insurance costs.  Higher credit scores and larger cash reserves are required for lower down payments.

FHA loans are quite flexible with regards to down payments.  Generally, the minimum amount down is 3% of the home’s sale price.  This 3% is made up of 2.25% down payment and .75% paid toward FHA allowable closing costs.  This 3% investment can be in the form of a gift from your family, church, or government agency.

Co-Borrowers

Conventional loans require that the owner/occupant of the home qualify on their own without help from a non-occupant.  FHA loans allow for the income of non-occupants to be used when qualifying for the loan.

Debt-to-Income Ratio

For a conventional loan, your PITI (mortgage payment) should not exceed 33% of your gross monthly income.  Combined debts (PITI and other recurring debt) should not exceed 41%.  View our previous post about PITI.

Your PITI (your mortgage payment) on a FHA loan should not exceed 29% of your gross monthly income.  Combined debts should not exceed 41%.  View our detailed information about debt-to-income ratios and how to calculate your own.

Mortgage Insurance

“Private Mortgage Insurance” (PMI) is mortgage insurance for conventional loans.  The rates vary and mostly depend on the amount of your down payment.  If you pay 20% down or more down, you are not required to carry PMI.

Mortgage insurance for FHA loans is called “Mortgage Insurance Premium” (MIP).  Much like the conventional loan, your down payment amount will determine your required mortgage insurance.  MIP is required for all FHA loans though MIP rates are typically lower than PMI rates for conventional loans with a similar 3% down payment.

Credit Score and Credit Rating

A conventional loan generally requires a higher credit score than an FHA loan.  The minimum score will vary depending on your down payment, income and cash reserves.  For a conventional loan, it is best to have a credit score of at least 620.  View Newbuyer’s advice on how to view your credit rating and score.

There are no stated minimums for FHA loans, but in most cases lenders will require a credit score of greater than 600 to get an FHA loan.  The higher your score; the lower your interest rate.

Learn those most commonly target by predatory lenders and how lenders select their victims. From the resource: “Over the past few years, predatory lending has become one of the biggest reasons for the increase in mortgage foreclosures. One reason for this is the increase in loans based on home-equity, not the borrower’s income.”

Source: SPOCH

Learn more about predatory lending at Newbuyer.com.

From the resource about the contract: “Once you’ve found a home, made an offer and the seller has accepted your offer, the seller’s agent draws up a contract specifying the terms and a closing date. When you sign this contract, you have officially agreed to purchase the home.”

Source: Practical Money Skills

Learn more about home closings at Newbuyer.com.

An example “do not” from the resource: “Do not start to spend for the new house until you are in it. Charging up your credit card on all those new furnishings could throw your debt to income ratios outside the boundary where you qualify for the mortgage.”

Source: Gold Beach Homes

View more home buying tips and mistakes at Newbuyer.com.

An example of how much you can save from the resource: “The amount of money that a home buyer can save depends on the share of the real estate commission, which is negotiable with the agent, and the sales price of the home. For example, buying a new home with a sales price of $500,000, with a 1 1/2% share, would save the buyer $7,500.”

Source: Real Estate Investing Blog

Read more home buying money saving tips at Newbuyer.com.

From the resource: “That agent (listed on the For Sale sign) represents the seller and is contractually bound to get the best deal for the seller. It doesn’t mean the agent can’t work with you in a fair and professional manner, but it does mean you should not disclose confidential information to the agent.”

Source: American Home Guides

Learn more about working with real estate professionals at Newbuyer.com.