No matter which side of the transaction you're on, you don't want to give up more than you have to.
After months of searching for the perfect home, making some offers, and maybe even competing with other buyers, you finally have a deal on your dream home. It took some negotiations, but you and the seller have come to terms.
Or have you?
Too often, getting a signed contract and putting your money into escrow is the beginning of what can become yet another round of negotiations. Here are five things every home buyer and seller should know about last-minute negotiations or credits.
Buyers may ask for credits based on property inspections.
Usually, a real estate contract either provides for a property inspection, or buyers inspect before signing. Depending on the property and the issues, a buyer might also have a particular type of inspection for the sewer line, septic, pool or roof.
These inspections can bring to light issues that the buyer couldn’t possibly have known about before making an offer. Once inspected, the buyer may still be interested in pursuing the sale. But given the needed repairs they will probably want to re-negotiate the price by asking for credits or a reduction in the purchase price.
Sellers should consider having a property inspection before listing.
The goal is to avoid negotiations once you’re under contract, because they’re not going to be in your favor. If you know the roof is near the end of its life or the furnace breaks from time to time, let it be known upfront, because rarely can you “sneak” something past the buyer.
You might even go as far as having your property inspected before listing the home. This way, you can address any issues, and make the inspection report available to buyers. They can come up with their best offer upfront, knowing what they’re getting.
If you have an inspection report or are otherwise assured your property is in great shape, you could even ask for an “as-is” clause in the contract. Although it’s not necessarily enforceable, it will send a strong message to the buyers that you aren’t open to more negotiation.
Sellers may try to avoid giving credits by having work done before escrow closes.
After inspections, the seller might agree to have work done before the closing. Or the seller may require that a payment is given directly to a contractor for the purpose of performing the specific, required work and nothing else.
These agreements help protect the seller, because buyers sometimes ask for credits just to help offset the closing costs — and never intends to do the repair work.
It also protects the seller if initial estimates for needed work turn out to have been overstated.
Buyers who ask for credits just to get the price down may be taking a chance.
Sometimes the buyer concedes on the purchase price thinking they can come back after the property inspection and ask for an additional concession.
The buyer may even feel empowered now that they’ve completed a series of inspections and are just weeks away from closing. The seller isn’t going to go back to the drawing board with a new buyer over a few more dollars, right?
Actually, they might. If it’s a strong buyer’s market, there’s a good chance the buyer can pull it off, but if it’s more of a neutral or a seller’s market, the seller may call your bluff. They’re assuming that you’re the one who, having invested all this time and money on inspections and an appraisal, isn’t going to walk away over a few dollars.
Buyers nearly always ask for credits, so sellers should give themselves some cushion.
You should also leave some additional room for negotiation when you’re in escrow. Always assume the buyer will ask for minor repair work — they nearly always do, even if there are no major issues. If you leave some cushion for yourself, you’ll feel better about the deal, and you’ll have protected yourself against the inevitable.
Conversely, the last thing you want is to be blindsided by a buyer asking for a few thousand dollars credit — just when you think the deal is finally done.
Whether you've lived in your home for a day or a decade, buckle up — homeownership can be a wild ride
You may live in your home for two years, or you may hunker down for two decades. But no matter how long you call it yours, you’ll likely experience these four key stages of homeownership — from the day you get your keys to the day you hand them off to your home’s new owner.
Read on to learn more about what to expect from each phase.
Phase 1: Starting out
The “sold” sign is posted, your belongings are packed, and the day finally arrives — you get the keys to your new home. You open the front door, and possibilities abound. How will you decorate? Where will that new couch go? Which rooms will the kids choose?
This first phase is all about unpacking, settling in, and getting to know your new home. If you’ve upsized from a smaller home, you may be tempted to jump in and start filling all that extra space.
And while you may be eager to make your mark on your new home’s interior (or exterior), Diana Bohn, a Seattle-based agent with Windermere Real Estate, warns against making extensive changes to a home right after moving in.
“It’s always good to be in your home for a year or so before knocking down any walls,” she explains. “Get your furniture in there, unpack, and see how the home lives. It’s hard to know how the space is going to feel until you’ve been there for a while. Go through all the seasons at least once.”
Phase 2: Settling in
It may take you a few months to move into the second phase — or even a few years (we won’t judge if you still have packed boxes gathering dust after a year or two). But this phase is when your house becomes a home, and you start enjoying your everyday life in the space.
You’ve figured out where all your belongings should go, you’ve done the bulk of your decorating, and you’re getting to know your neighbors and a few local hangouts. You’ve likely celebrated the holidays in your home a time or two, welcomed out-of-town guests, and gotten to know (and love?) your home’s unique quirks.
Phase 3: Fixing up
If the housing market continues its current upward trend, it’s likely that, after even a few years in your home, you’re sitting on some equity. So what should you do with it? Phase 3 is often the time when homeowners can take advantage of equity they’ve gained.
First, if you bought an older home, it may be time to update some of your home’s major systems — think furnace, roof, or windows. Portland, OR-based mortgage broker Lauren Green of Green Family Mortgage recommends researching two options for financing home improvements: home equity lines of credit (HELOC) and cash-out refinances.
“Many people have no idea they can access their home’s equity,” Green says. “They think the only way to take advantage of their home’s increased value is to sell it, but in reality, there are some great ways to access the equity in your home while still living in it.”
Second, after living in your home for a few years, you probably have a better idea of the renovations that would really make your home work for your lifestyle.
“There are lots of reasons why someone may decide to remodel instead of sell and look for a new home,” says Tyler Coke, project manager and business development manager at Marrone & Marrone, a custom home builder and remodeler in the Bay Area. “One thing that appeals to many homeowners is the custom aspect of it. You can design and create exactly the type of space that fits your lifestyle and speaks to how you use your home.”
Phase 4: Moving on
When will you know it’s time to move on? And what will prompt you to move somewhere new?
“Usually, it’s some kind of transition that causes people to sell,” says Bohn. “A new job, a growing family, or downsizing once the kids move out. In big cities, we’re also seeing people moving from more centrally located neighborhoods to farther-flung suburbs, where their money will get them more.”
Whatever your reason for putting your home on the market, the day you sign on the dotted line and close your front door for the last time is likely to be a bittersweet moment. But change can be good, and the next time you buy a home, you’ll be well-versed in all four phases and know just what you’re looking for.
Know which financial weaknesses stand out to lenders so you can strengthen your chances of loan approval.
Trained to spot financial mismanagement, mortgage lenders take careful time to review your finances before approving or denying you for a home loan. The role of the lender in approving a loan is to make sure you have enough money for a down payment and closing costs, and to assess whether you’re able to regularly make your monthly payments. Part of how they do that is by reviewing your bank statements. That’s why it’s important to make sure all your documents and records are sorted and straightforward.
Bank statement warning signs
Lenders typically include your last two months of bank statements in their evaluation of your finances. Having a long list of overdraft charges in your account isn’t the best indicator that you’ll be a good borrower. No matter the circumstances, having a history of overdrafts or insufficient funds noted on your statement shows the lender that you might struggle at managing your finances.
Another red flag to lenders is when a bank statement has irregular or lump-sum deposits. This can be seen as iffy because it could appear that those funds are coming from an illegal or unacceptable source. Unless you can provide an acceptable explanation for your large deposit, it’s likely the lender will disregard those funds and apply your remaining dollars to their assessment of whether you qualify for a loan.
Signs of the bank of mom and dad
One way to help ensure that your bank statement won’t raise any red flags with lenders is by having consistent, tracked payments. If, for instance, you have automatic monthly payments to an individual rather than to a bank, lenders could see that as a non-disclosed credit account. This would be the case if you were to take out a loan from your parents and make car payments to them rather than an actual bank, for example.
How to reduce bank statement scrutiny
Take extra care of your transactions for at least a few months before applying for a mortgage. Lenders want to know that the money in your account has been there for some time, not just recently deposited. One or two big deposits into your account right before applying could indicate to lenders that the money you claim to have isn’t actually yours or isn’t a “seasoned” asset, meaning the money hasn’t been in your account for at least two months.
At the end of the day, it’s best to start the process of organizing your bank activity and statements prior to applying for a loan. When you start looking for a home, it’s best to have your financial information sorted in case your dream home hits the market and you have to move fast.
If you keep your bank statements top of mind in the initial search phases, you may have an easier time applying for a loan and ultimately securing it. Remember: Underwriters review your accounts once more, just prior to closing. So, be sure to maintain healthy finances throughout the closing process too.
Your partner’s credit history can influence your future interest rate.
Whether you’re a seasoned or first-time home buyer, be prepared to know your FICO score and have a firm understanding of your credit history. And if you’re buying with another person, their credit history can affect your joint home purchase.
What is a FICO score?
First things first — what’s a FICO score and why does it matter? FICO is an acronym for the Fair Isaac Corporation, the company that developed the most commonly used credit scoring system. Everyone is assigned a number ranging from 300 to 850. The number assesses your credit worthiness through previous payment history, current debt, length of credit history, types of credit and new credit. For the purpose of buying a home or obtaining a loan, it’s the score most commonly used by lenders to determine the borrower’s level of risk. Many people simply refer to the FICO score as “credit score,” so we’ll do that moving forward.
Which score do lenders look at?
Typically, your lender will look at three credit scores reported from each of the three credit bureaus — Experian, TransUnion and Equifax — and then take the median score of the three for your application. Borrowers should hope for at least a 680, which is generally the minimum score for getting approved for conventional loans. For borrowers with lower credit scores, FHA loans allow a 580 score, or even as low as 500 if a 10 percent down payment is made. In any case, the higher the score, the better interest rate you’ll be offered.
Should I apply with my spouse or alone?
Deciding whether or not to include a spouse or a co-borrower on a mortgage application often comes down to whether it makes the most financial sense.
There’s not a ton of wiggle room when it comes to qualifying for a loan. You typically qualify or you don’t. If the only way you can qualify for the loan is by applying jointly to include the total income of both borrowers, then that might be your only option. But even if your credit and income are good enough to qualify for a loan on your own, applying together still might be a better option, as each scenario has its tradeoffs.
My partner has bad credit
When applying jointly, lenders use the lowest credit score of the two borrowers. So, if your median score is a 780 but your partner’s is a 620, lenders will base interest rates off that lower score. This is when it might make more sense to apply on your own.
The downside in applying alone, however, limits you to just your income and not the combined amount from you and your partner. While your credit score might be better, having a lender evaluate you on only your income could lower the total loan amount you qualify for.
If having your name on the home is a big deal, don’t worry. You can still be on the title of the home, just not on the mortgage.
Home equity burning a hole in your pocket? You may want to think twice about that boat.
Home equity is a valued resource, and if you have it, you might be tempted to tap that wealth for other purposes. A home equity loan, which allows you to use your home’s equity as collateral, is a great way to do this. But depending on your personal situation, it may not be the right thing to do.
Here’s when a home equity loan makes sense — and when it doesn’t.
DON’T: Fund a lifestyle
Remember when homeowners yanked cash out of their homes to fund affluent lifestyles they couldn’t really afford? These reckless borrowers, with their boats, fancy cars, lavish vacations and other luxury items, paid the price when the housing bubble burst. Property values plunged, and they lost their homes.
Lesson learned: Don’t squander your equity! Look at a home equity loan as an investment — not as extra cash when making spending decisions.
DO: Make home improvements
The safest use of home equity funds is for home improvements that will add to the home’s value. If you have a one-time project (e.g., a new roof), then a home equity loan might make sense.
If you need money over time to fund ongoing home improvement projects, then a home equity line of credit (HELOC) would make more sense. HELOCs let you pay as you go and usually have a variable rate that’s tied to the prime rate, plus or minus some percentage.
DON’T: Pay for basic expenses or bills
This is a no-brainer, but it’s always worth reiterating: Basic expenses like groceries, clothing, utilities and phone bills should be a part of your household budget.
If your budget doesn’t cover these and you’re thinking of borrowing money to afford them, it’s time to rework your budget and cut some of the excess.
DO: Consolidate debt
Consolidating multiple balances, including your high-interest credit card debts, will make perfect sense when you run the numbers. Who doesn’t want to save potentially thousands of dollars in interest?
Debt consolidation will simplify your life, too, but beware: It only works if you have discipline. If you don’t, you’ll likely run all your balances back up again and end up in even worse shape.
DON’T: Finance college
If you have college-age children, this may seem like a great use of home equity. However, the potential consequences down the road could be significant. And risky.
Remember, tapping into your home equity may mean it takes longer to pay off the loan. It also may delay your retirement or put you even deeper in debt. And as you get older, it will likely be more difficult to earn the money to pay back the loan, so don’t jeopardize your financial security.
In early 2011, you may remember there was a lull in foreclosure activity – a lull that was prompted by nationwide scrutiny into lenders’ home-seizure practices. But in more recent months, as barriers that have been holding foreclosures back have been removed, banks, anxious to rid their books of long-delinquent mortgage loans, have been stepping up foreclosures — all over the country.
Granted, we’re well below the peak levels we saw from 2007-2010, but even so, consider this: In March, 2012, foreclosure filings were reported on nearly 200,000 properties — that’s 7.4 out of every 10,000 homes. With many more foreclosures in the pipeline, here’s how to avoid becoming a statistic:
Buy a home you can truly afford
Ok, so this is an obvious point, but reiterating the numbers is never a bad idea: Your housing costs (mortgage, insurance, taxes) should be no more than 25-28% of your monthly take-home pay. Use Zillow’s affordability and mortgage calculators. They’ll estimate the monthly costs of home ownership within the context of your monthly budget. If the payments seem too unruly (Give them a test drive!), you may need to come up with a larger down payment or shelve your purchase plans altogether.
Contact your lender immediately!
Doesn’t look like you’re going to be able to make that payment .. again? You need to let your lender know about your financial woes immediately, and, ideally, while your head is still above water and your credit is in tact.
Consider temporary relief
If you think that your inability to your make your mortgage payments is going to be temporary, see what kind of temporary relief your mortgage servicer can offer. They may be willing to accept reduced payments over a certain period of time; they may allow you to skip payments over a certain period of time; they may extend the grace period for late payments. Just remember: these solutions are temporary, so in the interim, try to find new ways to slash spending and save more. You must also prioritize your bills, paying attention to the ones that are the most essential.
Look into a modification
If your financial situation has permanently changed, then temporary relief is not going help much. You may need to have your loan modified. And while there are many different ways to do a modification, they generally incorporate interest rate cuts, term extensions and principle reductions – or a combination of these methods. Yes, there is a lot of paperwork involved, and yes, it can be complicated, but banks are under pressure to do these modifications and as a result, we are seeing higher success rates: the average savings, per modification, is about $500 a month. To see if you are eligible for a modification, go to makinghomeaffordable.gov.
Explore a short sale
If you’re underwater (as 23% of homeowners are today), cash-strapped, desperate for relief, and foreclosure is looking imminent/speed is of the essence, then you might want to consider a short sale. This where you’re selling your home, for less than what you owe on it, to your mortgage lender. The upside: No more negative equity burden; it’s not as damaging to your credit as a foreclosure is; you can purchase a home again in as little as 3 yrs; and you’re selling your home with your pride in tact.
Prominent tax advisers still don’t agree on whether all those people who prepaid 2018 property taxes can deduct them in full.
The debate on such deductions arose after Congress passed the largest tax overhaul in three decades late last year. In a landmark change, lawmakers capped write-offs for state and local taxes at $10,000 per return for both single filers and married couples. The provision takes effect for 2018 and will lower these write-offs for millions of Americans.
The overhaul barred deductions for many prepayments of 2018 state and local income taxes, but it was silent on deductions of prepaid property taxes. After Christmas, long lines of people rushing to prepay their 2018 property taxes before year-end gathered at local government office.
Then on Dec. 27, the Internal Revenue Service warned that not all prepayments of 2018 property taxes would be deductible on 2017 returns. The agency said that to qualify for a write-off, the tax liability actually had to have been known at the time.
Right away, some tax specialists strongly agreed with the IRS but others strongly disagreed. The IRS and its supporters argued that those who prepaid all their 2018 property taxes can only deduct the portion that was known or determined at the time. In many cases, that means only for a few months of the year or not at all.
The IRS’s opponents argued for higher deductions of reasonable estimates. They based this argument on prior tax rulings and regulations that they think apply to this issue.
Now, three months later, little progress has been made.
Leading the opposition against the IRS’s position is Lawrence Axelrod, an attorney at Ivins, Phillips & Barker.
“The IRS position is misguided because it doesn’t take into account Treasury’s own regulations,” he said.
These regulations allow taxpayers to deduct amounts paid that will be due within 12 months. The IRS and its supporters disagree. They cite court decisions which say that to be deductible, taxes must have been imposed and the amount must be known.
Stephen Baxley, who heads tax planning for Bessemer Trust, a prominent multifamily office, agrees with Mr. Axelrod.
“If the amount is a reasonable estimate made in good faith, it’s deductible,” he says. The firm is responsible for preparing nearly 1,000 individual returns.
Other tax preparers agree with the IRS.
Brian Lovett, a certified public accountant with WithumSmith+Brown in New Jersey, where property taxes tend to be high, says his firm is following the IRS’s guidance: “We think the amount due must be determined for a prepayment to be deductible.”
The correct answer matters.
More than 80% of property-tax revenue is collected by local governments with a fiscal year other than Dec. 31, according to the latest data compiled by the Lincoln Institute of Land Policy. Frequently, the fiscal year ends on June 30.
As a result, total property tax bills for 2018 weren’t determined by year-end in many areas of the country. Many could reasonably be estimated, however.
For example, say John lives in a county with a fiscal year ending June 30. By the end of 2017, he knew he would owe $6,500 in property tax due by June 30, 2018. He could likely assume that his bill for the second half of 2018 would be about the same. So in late December, he prepaid $13,000 for 2018 to his county.
According to the IRS’s position, John can only deduct a prepayment of $6,500—because the amount due for the second half of the year hadn’t been set.
But if Jane lives elsewhere and knew she would actually owe $13,000 in property tax for 2018, she can deduct a prepayment of that amount on her 2017 return.
Some advisers allow both approaches. David Lifson, a CPA with Crowe Horwath who has many high-earning clients, says he recommends that clients deduct prepayments of known amounts. But he will allow a deduction of an estimate, “if I feel the client understands the risk that the IRS will disagree.”
The debate is ongoing. In March, Democrats on the Ways & Means Committee wrote acting IRS Commissioner David Kautter to protest the IRS’s interpretation of the law.
The good news for taxpayers who want to deduct prepayments of estimates is that neither Mr. Lifson nor Mr. Baxley thinks these write-offs need to be disclosed on IRS Form 8275. On it, taxpayers are supposed to disclose risky positions to avoid certain penalties. Supporters of the IRS’s position think the form should be filed, however.
Some taxpayers are also pushing preparers to take the deduction because the audit risk is low, given constraints on IRS resources.
Emily Matthews, a CPA with Edelstein & Co. in Boston, says she explains the IRS’s position to clients. But she says, “I think we’ll see a lot of people who prepaid estimated taxes opt to deduct them.”
Interest rates have surged in the opening weeks of 2018, raising uncomfortable questions about how much higher they can go before home purchases become unaffordable.
But there’s one area of the housing market where the impact is already being felt. Approximately 1.4 million Americans lost the interest rate incentive to refinance their mortgages in the first six weeks of 2018, according to an analysis from real estate data provider Black Knight.
The benchmark 30-year fixed-rate mortgage averaged 4.43% during the week ending March 1, according to Freddie Mac’s weekly survey. That was up three basis points from the prior week and leaves rates nearly half-a-percentage point higher than the level at which they started the year.
Whether or not a refinance makes sense depends on a lot more than just being able to seize a lower interest rate. Borrowers have to have enough equity in the home, and appear creditworthy—to have a job and have been paying the existing mortgage faithfully, in other words.
That’s why as recently as last year, even after years of interest rates being stuck at rock-bottom lows, millions of Americans would still have found a refinance helpful, according to Black Knight’s analysis.
Those other considerations aren’t immaterial. Data from the Mortgage Bankers Association shows that mortgage applications for refinances held steady throughout January, even as rates jumped. It wasn’t until mid-February that they turned sharply down: the number of applications to refinance in the week ending February 23 was nearly 10% lower than the same period last year.
Industry participants believe many Americans are rushing to get ahead of rates that are only expected to go higher from here.
In the past, when rates have risen, the average credit score of refinance originations has usually declined, Black Knight noted. That’s because more financially savvy borrowers, who usually have better credit scores, tend to jump at the best rate opportunities.
Meanwhile, most housing finance experts expect the shift away from refinances to bite into overall mortgage lending this year. Refis were about 35% of all mortgages last year, according to data compiled by the Urban Institute; experts they surveyed expect that to decline to 27% this year. (In the most recent weekly data from the Mortgage Bankers, refis were 42% of all applications, down from 44% the prior week.)
Also of interest: higher rates are impacting how Americans think about which type of mortgage to choose. The share of mortgage applications for adjustable-rate mortgages jumped to 6.7% in the most recent week, MBA said. It’s ticked up every week in 2018.