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FAQs

How many homes does a typical first time home buyer see before they make a decision?

Always a top question at our seminars.  It really all depends on a few factors:

1. Range of preferred cities / neighborhoods
2. One type of home or open to any type of home (single family / condo / townhome)
3. Renting or living with parents
4. Personality of the buyer
5. Buying single or as a couple. There are other factors, but these are the most common.  Our average number of homes that a client will see before they make an offer is around 25 – 30 homes. However, these factors all play into whether that amount will be more or less.

Range of possible cities / neighborhoods: One time we had a client tell us they wanted to look from Evanston to Lake Zurich, then as far south as Carol Stream.  But they didn’t want to live in the city.  We laughed after their closing when we talked about that criteria saying it was a relief that they at least eliminated Chicago in their search.  Those people took awhile as we saw maybe 50 – 60 homes.  Some folks nail it down to a particular neighborhood.  In that case, those buyers typically move more quickly (10 – 15 homes).

One type or all:  Around 20% of our past first time home buyer clients were open to all types of homes or between two of the three: single family homes, condo, and / or townhome.  At certain price points in certain areas, this is a great idea.  Just bear in mind, this will take some time.  For those that want to decide between the type of home AND location, it takes a little longer.

Renting or living with parents:  When you live with your parents, your only timeline to purchase a home is dependent on your tolerance level of having your parents be roommates.  This can be one month or six.  When you’re renting, your timeline depends on your lease expiration.  When we talk to people and discuss their lease expiration, we look at all these factors as to when we’ll start taking a client to look at properties.  It gets a little tricky because if you start too early, you might be forced to make a rent payment along with a mortgage payment.  Too late and our client is frustrated.  But we usually get the timing down given the situation of the buyer.

Personality of the Buyer:  When you bought your new camera, did you research each camera for 5 days straight?  Are you an accountant or an attorney?  Do you often have buyer’s remorse on ALL large transactions?  If you answer yes to any of these questions, you might take longer than the average to find a home.  The opposite holds true as well.  Are you in sales?  The new road bike you bought, was it a 20 minute decision?  Did you get engaged within 3 months of meeting your spouse?  You might be jumping into a home a little too quickly.  Make sure you have an agent that can ensure you’re seeing everything before you decide.

Buying single or as a couple:  When a couple goes through this process, they rely on each other. Uncertainties are discussed and reassurances are given to each other.  90% of the time, the couple has an easier time throughout the home buying process than a single buyer.  Why? The single person, even with a top notch agent, always feels like they are alone.  It’s 100% on them, and for some, this adds too much pressure to the process.  Uncertainty often creeps in at some point and they don’t have the significant other to provide the encouragement.  Most battle through it, the process just takes a bit longer than usual.

With the points laid out above, you can see that the time frame to purchase contains a few variables.  Know which ones apply to you and it should make this process a little easier. 

How Much Money Should I Put Down on a Home?

If you can put down 20%, do it.  If you can’t, you’ll be in the 5% – 15% down payment range, and that’s o.k.  But if you have under 20% to put down (more than 60% of our clients put less than 20% down), what’s the magic number?  We often ask the question, ‘how much money do you have in the bank now?’. If a potential home buyer wants to buy a

$300,000 home and has $15,000 to their name, we will have a hearty discussion about what their costs will be when they own a home (furnace, air conditioner, appliances, etc.) as well as unexpected life events (loss of job, pregnant with twins).  You must have cash left over when you walk away from the closing table. If the buyer in the example above states they have $30,000 in the bank, we discuss the possibility of NOT putting down 10% but rather putting down 5%, OR they continue to save.  But they can buy with 5% down and they’ll have $15,000 left over in case something happens.

But here’s the main question that goes along that thought process: does my interest rate change depending on my down payment amount?  The answer is no.  However, your mortgage insurance (PMI) rate does.

Here’s a good example.  Let’s assume you have credit over 740, good debt to income ratios.  If you put down 20%, you don’t pay PMI.

If you’re getting a $300,000 loan and your down payment is:

A. 15% = your PMI rate is .23% or $57.50 a month

B. 10% = your PMI rate is .37% or $92.50 a month

C. 5% = your PMI rate is .51% or $127.50 a month

These numbers should factor into your decision when deciding on your down payment amount.  As with all things, we want you know as much information as possible so you can decide.

What are closing costs and how much will I need to pay at closing? (Please note these figures are estimated.)

Lender Fees: 

Loan Application and Appraisal: $250-$500.  Paid to lender to cover appraisal and credit report, however this is usually paid before closing.

Underwriting Fee: $250-$500. Charged by the lender to underwrite borrower’s file.

Origination Fee: This can be called something different, but it’s right around $500

Please note: Lenders can put different labels and amounts for the Underwriting Fee and Origination Fee, however those two fees plus the appraisal should not equal more than $1,500.

Title Fees:

Title Insurance: $450 for every $50,000.

Settlement of Escrow Closing Fee: $500 up to $1000.  This is basically the cost of utilizing the title company’s office space and cost of office staff.

Document Preparation/Recording Fee: $200-$500.

Flood Certification: (optional) $10-$40 (if property is in the flood zone)

Lender’s Title Insurance Policy: $250-$500. Required by lender and paid to the title company to insure lender’s interest in the property (first mortgage).

There will be other costs for various endorsements depending on the type of property you are purchasing.  For example, if you’re buying a condo, there’s a condo endorsement fee of $175.

Miscellaneous Fees:

Attorney’s Fees: $400-$600. Paid to your legal representative to handle closing and review contract and loan documents.  Not required in Illinois, but 98% of buyers utilize one (we strongly recommend utilizing real estate attorneys).

Transfer Tax: Not all municipalities charge a transfer tax stamp, but here are some examples:  Bartlett ($3 per $1,000 of purchase price), Addison ($2.50 per $1,000), Chicago ($7.50 per $1,000).

First Year Homeowner’s Insurance: Varies. Just for context, you could plan on Condos and Townhomes to be around ($150-$500) per year and Single Family Home around ($800-$1500) per year.

Upfront PMI – Private Mortgage Insurance: Required for FHA loans, but you can roll this amount into your loan.  Some conventional loans have this option as well, please check with your lender.

Survey (for a single family or PUD only): $275-$500 usually paid for by seller, EXCEPT FOR SHORT SALES OR FORECLOSURES (Surveys are not required for condominiums.)

Tax Service Fee: $50-$100 (if taxes are held in escrow)

Condominium Board Fees: Depending on the condominium building, some management and condominium boards have fees that are required to be paid by the buyer.  Often with condominiums there is a “sale packet” that provides the information about fees and refundable deposits.  USUALLY THIS WILL NOT BE PAID AT CLOSING, but you’ll pay it at some point.

If you are buying a foreclosed condo, you might be required to pay 6 months of past due assessments at closing.

Costs Paid Before Closing:

Property Inspection (not paid at closing, rather at the time of inspection): $250-$500.  After your contract is accepted, you will likely hire a home inspector to inspect the condition of your future home.  Those costs vary depending on the property type.  This is not the same as the appraiser that determines the value for your lender.
Lead Paint Inspection: (optional) $250-$500
Radon Test: (optional) $125-$250
Appraisal (noted above): $400 – $500

PRE-PAID (ESCROW) FEES

Reserve Fund for Tax Escrow: 2-7 months prepaid real estate taxes.

Prepaid Interest: Interest on the note paid to lender from the date of the closing through the last day of the month.

Please understand that you will get a credit from the seller for taxes that are not paid. It’s usually is a little less or a little more than a full year’s worth of taxes.  For example, if the taxes are $6,000 and you’re purchasing at a time to where a tax bill hasn’t come out for 12 months, you’ll be getting around $6,000 at closing from the seller.  Your lender will take a portion of this amount (see Reserve Fund for Tax Escrow above), so what’s left of that tax credit is what will go toward your closing costs.

Example:

Taxes: $6,000

Seller Credit at Closing: $5700

Lender Escrow: $3000

Your net amount from seller’s credit for taxes: $2700 (this will go towards your closing costs)

The catch? When you sell, you’ll have to pay a full year in taxes to the buyer of your home.

Is buying new construction similar to buying a new car? Am I paying more per square foot because it's new vs. existing construction? Am I able to negotiate?

Yes, yes, and yes.  We’ll first start by saying that buying a $500,000 new construction home is more of a process than buying a $20,000 new car. However, some of the principles are similar and some of you reading have purchased a new car at some point. Buying new construction does have its advantages much like buying a new car. You are able to customize and upgrade:

Colors

Cabinets

Countertops

Flooring

Floor plans

Faucets and shower heads

These are only a few, but there comes a cost for these upgrades, just like an automobile.  And sometimes, this is where the builder will make a high margin.  This will vary from home builder to home builder. 

It’s better to explain in an example:

Bill is buying a home through ABC builders.  The home he wants to buy costs $400,000. That’s the BASE price of the sum.  With that BASE price, the builder will include STANDARD features.  Example: carpet on the second floor and laminate floor on the first floor.

When Bill went through the model home, there was nice carpet on the second floor and beautiful hardwood floors on the first floor.  This is where Bill has to begin a certain mindset. The carpet on the second floor in the model, is that the STANDARD carpet that’s included in the BASE price?  The hardwood floor? Bill knew laminate was included in the BASE price, but how much is hardwood flooring?  Are there different types of hardwood to choose from?

The brushed nickel lighting fixtures throughout the house…are those standard?  If not, what is and how much is the upgrade?

As far as price per square footage, always know that you are paying more than existing construction.  It can be anywhere from 5-20% depending on the area, time of year, and how much you negotiate.  Your real estate agent will help you pull comparables in the area and show you what the overall market is doing at your price point.  This is where you want to be careful in the upgrades.

If you go too heavy on the builder upgrades, you might be pricing yourself out of the market and this is a factor when you sell the home. Look at the cost of upgrades vs. what you can do yourself after closing. In the example above, Bill is deciding whether he wants hardwood flooring on the main level at $12.00 a square foot through the builder, or if he’ll take the laminate floors (standard) but after closing, he’ll install $7.50 a square foot hardwood floors himself through a flooring contractor. This is important when buying a new home.

Can you use a real estate agent to help you with all of this?  Yes.  Most (maybe 95%) of home builders will pay your real estate agent’s commission AND it’s included in your price.  Your agent’s commission is not affecting your price.  As a matter of fact, a good agent will help you negotiate a better price and / or add upgrades when it’s possible (most of the time).  They should also help in the builder upgrades vs. after closing contractor update costs, as well. Take your time and ask questions BEFORE you sign the deal.

What are the top three things I need to look at when walking through a single family home for the first time?

Outside of determining whether the home is right for you on an aesthetic level (layout, backyard, elevation, size of rooms), the next three items might be a matter of opinion, but this is what we think: 1Roof 2. Mechanicals 3. Windows

There are other items to look for (past water stains in the basement, flooring, siding, concrete around the home, etc), but you start getting into items that are better covered by a home inspection expert.  Remember, you will have a home inspection contingency as long as you’re using the Multi Board 6.1 contract.

1. Roof:

The age of the roof is very difficult to ascertain, especially from the ground.  But there are things to look for:

A. 20, 30, or 50 year old shingle
B. Shingles cupping? http://www.roofmonkeys.com/inspect-roof/
C. Flashing: http://www.roofkey.com/roof-to-wall-flashing.html

Again, your home inspector will inform you of the positives and negatives of your potential roof, but we believe the age should be considered before making an offer.  Always ask the seller for the age of the roof.

2. Mechanicals:

Let’s break down the major mechanicals of a home and their replacement costs:

A, Water heater ($800 – $1200)
B. Furnace ($3000 – $6000)
C. Air Conditioner ($3000 – $6000)
D. Sump Pumps ($250)

Yes, there are others but these are the main items that almost all first time buyers seem to overlook.  We also realize that we have a large range listed for a furnace and air conditioning unit, but this all depends on the size of your home.  We list sump pumps because we’ve seen clients get into homes and the sump fails, causing problems.  Ask the seller how old the sumps are and get back up sump pumps.

3. Windows:

A regular sized window might only cost you $450 per window, but if you’re buying a home with 20 windows, add it up and it can be the most costly replacement item in the home.

You’re looking for single, dual, or triple pane windows:

Single pane windows are inefficient compared to dual or triple pane windows.  The only time we see single pane windows is where the windows themselves are over 20 years old.  This can be a sign that they need to be replaced soon.

How do I know if there was ever water in the basement?

Probably one of the most asked questions when someone buys a single family home.  First, the seller of the property is required to fill out this disclosure:

You’ll see the second question of the Illinois Residential Property Disclosure pertains to basements: “Flooding or Recurring Leakage in the Basement”

There are those that are exempt from answering these questions such as banks and estates.  Every other seller has to fill this out.  There can be legal recourse if the seller is found fraudulent in their answer to this question.  This is not an easy case however.  The buyer would have to prove that the seller knew about the issue, and that’s difficult to prove if the home was built in the 1950’s and there’s been several owners.

When we show homes, we’re looking for evidence of water intrusion.  Staining on wood / dry wall / metal (usually support beams). 

Sometimes we see a beautiful finished basement, then we dig as best as we can and find something on the back side of the drywall.  Then we ask questions, and if the answer is ‘we don’t know what you’re talking about’, it might be time to move on.

That all being said, if a basement has gotten water in it at some point, this doesn’t always mean it’s a home to avoid.  We actually like it when a home seller discloses water issues then provides documentation on how they fixed it. Permaseal and US Waterproofing will guarantee their work and most of the time it’s transferable.  Sometimes it’s not the basement’s fault it flooded, sometimes it can be a sump pump that failed and there’s no back up pump / battery system.   If there’s ONE basement mystery we’ve seen over the years, this is the top riddle.  Why someone would pay $30,000 to finish a basement and not install a $1,000 battery back up system is a true mystery, but we see it often.

There is one person who can tell you if there was an insurance claim on your prospective home: your insurance agent.  As real estate agents, we don’t have access to that database.  Not everyone makes an insurance claim when they have water intrusion, but if they did your agent should see the claim.

Do I have to change the galvanized piping in the house to copper pipes?

This question came up AFTER we pointed out that there was galvanized piping in a home. We see a lot of single family homes that are built prior to 1970 with galvanized pipes. Nowadays homes are built with copper or PVC piping. Our opinion, and we’re not home inspectors, is that galvanized piping is something that will need to be changed. The question is ‘when?’.

The issue with galvanized piping is that it corrodes from the inside out. As it corrodes, water pressure lessens. At some point, the amount of pressure will diminish to the point of no pressure at all; basically your pipes become a closed faucet.

If you’re looking at older homes, please know what these pipes look like. Most agents will not point them out to you. This does not mean you shouldn’t buy a home with galvanized pipes. Just be aware that this might be your cost down the road. And the cost to replace the pipes in a 1,000 square foot home with an unfinished basement is going to be significantly lower than a 2,800 square foot home with a finished basement. If you’re deciding between two homes you like, and one has copper pipes while the other has galvanized pipes, this could be a factor in your decision.

How about some True / False?

The best deals out there are short sales and foreclosures – False
There are sellers out there with equity in their homes that need to sell.  Also, some of the best deals we’ve seen in the past 11 years have been estate sales.

In Illinois, most of the appliances stay with the property when it sells – True, for the most part.  Just make sure you ask for them in your contract.  Some folks are taking their fancy washer and dryer, but a wise man once said, ‘everything is negotiable.’

I have to have 20% down in order to buy a home these days – False.
About 25% of our past clients have put down 20%.  You can put down as little as 5% with a conventional loan and FHA still allows 3.5% down, but we tell everyone that we like to see a cushion for emergencies.  If $10,000 is what you have to your name, and your down payment will total $8,000, wait a year and save money.

Another scenario we’ve seen lately are those that are right on the verge of putting 20% in order to avoid PMI (Private Mortgage Insurance).  Thus they are looking to buy a home with a much lower purchase price than they can afford.  This is GREAT, as long as you like the homes in that price range, but lately we’re seeing people battle this scenario.  Meaning, the homes aren’t making them excited.  With the exception of an FHA loan, please note that PMI is not forever.  If you end up having to put 15% down, you can elect (most of the time, please ask your lender) to drop your PMI after you’ve paid down your mortgage balance to 78% of your original purchase price.  So if you put 15% down (85% of the purchase price), you have 7% to go until you send a letter to your lender and say, ‘I’m at 78% Mr. Wells Fargo guy, take my PMI off.’  How much is PMI?  Completely depends on your credit, purchase price, and a few other factors but the average is $100 – $200 a month.

I can write off my mortgage interest and real estate taxes against my income – True. Learn this scenario, it’s very important.  Some of you are going to save a few hundred dollars a month (see below).

If I’m going to get an FHA or VA loan, then I can’t buy a condo – False

The association, building, or subdivision has to be FHA or VA approved.

I have to pay, out of my pocket, for my real estate agent and mortgage lender – False, with some exceptions.  The loan officer is paid by the bank, although you will pay some lender fees at closing (should be about $1,000, including your appraisal).  If you utilize a buyer’s real estate agent and you purchase a home listed in the MLS, your real estate agent that represents you is paid by the listing agent’s real estate broker, which is paid to them by the seller.  So again, as a first time buyer, the fee for your agent is included in the price of the home if you buy a home that is listed by another real estate agent and it’s listed in the MLS.  SOME buyer’s agents have agreements with different terms (most don’t).  When you sell, it’s your turn to pay both agent’s fees if you utilize a real estate agent to sell your home.

If I put a contract in on a short sale, do I have to wait the whole 60 – 200 days or so for the bank to come back to me with their response?

Answer – No. You can negotiate this upfront or have your attorney write in their attorney review letter’ that the buyers will stay in the contract for 60 days, and at the end of those 60 days, the buyer will notify the seller and the seller’s bank if they will continue to wait for an answer.  You basically want to see if there’s progress being made on the deal or not.  If there’s not, you can elect to cancel the contract and find something else.  But again, you must have this clause in writing before the attorney review period ends.