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For Sale by Owner Guide

Guide for Buyers

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Resolve Any Issues

It is inevitable that issues will arise during the transaction. Keep a cool head and work through them one at a time.

Do your best to be patient and stay unemotional. Working through the details can be the most trying aspect of buying a home.

Be sure to keep the goals in mind. Your goal is to buy the house, and the seller's goal to sell. Work for the win-win solution.

Inspection-Related Problems

Home inspection reveals deficiencies and buyer asks for repair or replacement

The contract will indicate what you can require the seller to fix or replace and what you can simply ask them to do.

Some options:

You can either ask the seller to have the work done prior to closing or you can ask for an amount of money that you will accept in lieu of the seller making the repairs.

Generally speaking, you should be most concerned about any structural repairs and replacement or repair of expensive items. It may be prudent to ask the seller to do only these things. You can do the small things yourself. The seller may be more inclined to fix a couple of large things rather than a laundry list of small repairs.

If some of the repair items are not really non-functioning, but rather just on their last legs (for instance, the dishwasher is 10 years old and the inspector indicated that 10 years is the expected lifetime) don't ask the seller to replace or repair. Ask instead for a home warranty and it will cover most appliances and systems. That way, everything is covered. NOTE: All appliances and systems must be in working order at the time the warranty is placed.

If something serious is uncovered, such as joist rot, foundation cracks, leaks in the roof, faulty wiring or plumbing problems, get a second professional opinion. If the problem is real, and you still want the house, push hard for the sellers to repair it. Rationale: Now that they know of the problem, they will likely have to disclose it to other potential buyers. It will probably come up in another buyer's inspection as well, so they might as well deal with it now.

Termite inspection shows active infestation

Generally, the contract calls for the seller to pay for treatment. Your lender will require that the infestation be treated. Once it is treated, the seller should provide that certification to your escrow officer.

Termite inspection shows prior insect damage

This is damage to wood areas caused by prior wood boring insect infestation. Usually the lender will require that it is repaired and some contracts call for the seller to repair it. If your contract doesn't specify who pays, you and the seller will have to negotiate who pays for the repair.

Get specific instructions from the lender as to what needs to be repaired. The termite report will have a list of the areas that require repair; have the lender fax it to you. It is easiest to have the same company make the repairs if they do that type of work; otherwise, ask them for the name of a company they recommend. If the work is extensive, such as joist damage, etc., get two or three quotes before you have the work done.

Radon inspection shows high radon levels

Radon levels can be lowered through various devices, including fans vented to the outside. Consult a radon specialist for treatment options. Get at least two quotes as prices can vary widely.

Appraisal-Related Issues

The appraisal is usually ordered by the lender and is used by the lender to insure that they are not over-lending. Indirectly, it also protects you from overpaying.

The result of a low lender's appraisal means the lender will figure your loan amount (LTV) as a percentage of the appraised value of the property, which will result in a lower loan amount than you requested. For instance, you request an $80,000 (80%) mortgage (meaning you are putting 20% down), on a $100,000 sales price. The property appraises for only $98,000. The lender will now refigure your loan amount at 80% of $98,000 or $78,400, so you with have to put another $1,600 down to get to an 80% LTV. Or you may still be able to get the $80,000 mortgage but will have to pay PMI insurance, since you are exceeding 80% LTV.

If you can get the same loan amount regardless of the low appraisal, then the contract may require you to go forward with the purchase. Check the contract and/or speak with a real estate attorney to determine.

Low appraisals are generally a means to renegotiate price with the seller. If you are going to take this tact, you should provide a complete copy of the appraisal to the seller along with your written request for a price drop based on the attached appraisal.

If you really want to buy the house and think it is worth the price you offered, then work to get the higher appraisal. Provide the lender with all the comparables you or the seller have researched and your notes. Check the appraisal for accuracy and challenge any inaccuracies. The lender might be willing to have another appraisal ordered (you can split the cost or the seller can pay for the second appraisal), especially if the first one has errors.

Reasons Houses Under Appraise

  1. An appraisal is based on PAST comparables--houses that have sold in the last 6 months. Many times a market will move upward fast and houses are actually selling higher than they were just 30 days before. When this happens, it is legitimate for an appraiser to consider houses currently on the market as compensating comparables to justify a higher appraisal.
  2. The house has an amazing feature that you just love and will pay more for, but it doesn't translate dollar for dollar into market value. If this is the case, you need to decide if the feature is worth the extra money.
  3. This appraiser is simply more conservative than another might be. After all, houses fall into a "range of value" and this is just one appraiser's analysis of the data.
  4. The house is truly overpriced.

Finance-Related Problems

Your financing is in jeopardy and/or declined

Find out specifically what the problems are. Try to resolve them in cooperation with the lender.

Ask for a copy of the lender's declination letter. The lender is required to notify you in writing that the loan has been declined. You will need this letter to prove you can't get the loan that you applied for. The seller may ask to talk directly to the lender. It is strictly up to you whether you allow that or not. The seller may be able to offer solutions to the problem, such as holding a part of the financing, dropping the price or delaying settlement.

If there is nothing you can do to help this lender approve the loan, ask the lender to give suggestions as to another company who could possibly make the loan and whether they will ASSIGN the file. Assigning the file means sending all the documents you have given to the lender, along with the appraisal, to the new lender, so that they don't have to collect everything again. Try to insure that the new lender will actually do the loan before you assign it. See if the old lender will talk directly to the new lender before they assign the file. They know the lingo and can best describe the issues.

Use the guides below to help resolve specific issues:

Unacceptable credit

  • Get a co-borrower (usually a family member) to lend good credit to the file.
  • Put more money down if you can.
  • Talk to lenders who specialize in "less than perfect" credit.
  • Try a different loan program. For instance, FHA and VA have slightly more lenient credit standards than conventional guidelines.

High front ratio - Your new PITI is a higher percentage of your gross monthly income than the lender wants to see

  • Get a co-borrower (usually a family member) to help you qualify.
  • Choose a program that allows you to qualify at a lower rate, such as a "buydown" and an adjustable-rate mortgage (ARM).
  • Put more money down on the house. Even another 5% can make the difference. Structure your purchase agreement so that the seller pays all your closing costs, leaving your funds free for down payment.
  • If you have historically paid as much in rent as your new payment, justify your ratios by evidencing that you have already been paying this much monthly. Provide copies of cancelled checks or a letter from the landlord verifying timely payment.
  • Persuade the lender that your income is on the rise. If you are expecting a raise or bonus in the near future, try to verify it for the lender.

High back ratio - Your new PITI plus your long term debt is a higher percentage of your gross monthly income than the lender wants to see

  • Add a co-borrower (usually a family member) to offset the high ratio.
  • Pay off some of your debt to lower the ratio if you have the cash.
  • Consolidate your short term debt to lower your monthly payments.

Inconsistent Employment History

  • If you moved from job to job to improve your income or opportunities, provide a statement and proof of that to the lender.
  • If you had a stable history prior to the last two years, which is what the lender is verifying, provide a letter of explanation for the recent instability and evidence of prior stability.
  • If you have had many jobs, but have historically made about the same income every year and have good credit, persuade the lender to consider your history "stable" on the basis of consistent average income and sound financial management.

Unacceptable Self-employed average income

  • Get a "no doc" loan if you have a substantial down payment. Many of these loans require no qualification ratios at all, but do usually require 30% down.
  • If you expect your income to increase in the near future due to upcoming contracts or more customers, try to verify that information for the lender. A good loan officer can help you build your case.

Self-employed income, commission, or bonus too new to be considered

  • Get a "no doc" loan if you have a substantial down payment. Many of these loans require no qualification ratios at all.
  • Get a co-borrower (usually a family member) to help you qualify.

Insufficient cash to close

  • Get a gift from a family member to help with funds.
  • Structure your purchase so that the seller pays all your closing costs and prepaid expenses.
  • Choose a zero point interest rate so you don't pay points on the loan.
  • Ask your lender about low down payment programs.
  • Borrow from your 401K or retirement fund for down payment and closing costs. You repay it to yourself!

Property unacceptable

  • Look for a loan program that provides renovation money to make the property acceptable after settlement.
  • Persuade your lender to put money in escrow, either from your funds or a seller contribution, to make the necessary repairs after settlement.

Property appraisal low

The appraisal is usually ordered by the lender and is used by the lender to insure that they are not over-lending. Indirectly, it also protects you from overpaying.

The result of a low lender's appraisal means the lender will figure your loan amount LTV as a percentage of the appraised value of the property, which will result in a lower loan amount than you requested. For instance, you request an $80,000 (80%) mortgage (meaning you are putting 20% down), on a $100,000 sales price. The property appraises for only $98,000. The lender will now refigure your loan amount at 80% of $98,000 or $78,400, so you with have to put another $1,600 down to get to an 80% LTV. Or you may still be able to get the $80,000 mortgage but will have to pay PMI insurance, since you are exceeding 80% LTV.

If you can get the same loan amount regardless of the low appraisal, then the contract may require you to go forward with the purchase. Check the contract and/or speak with a real estate attorney to determine.

Low appraisals are generally a means to renegotiate price with the seller. If you are going to take this tact, you should provide a complete copy of the appraisal to the seller along with your written request for a price drop based on the attached appraisal.

Other Issues

Survey shows encroachments

The title/escrow attorney/agent will direct you and the seller in a solution.

Title search reveals problems

The title/escrow attorney/agent will direct you and the seller in a solution.

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