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The Ins and Outs of Financing a Home

First-time buyers and old pros alike should find helpful information in “The Ins and Outs of Financing a Home.” Step-by-step, the section guides the potential homeowner through the home-buying process, from finding an agent to making an offer on a dream home. Also included are a glossary of real estate terms and a checklist of actions to expedite the loan application process.

Houstonians love the quality of life here, and few things speak to someone's happiness more than his or her home and its location. With beautiful parks, a fun nightlife, excellent job opportunities and welcoming neighborhoods, Houstonians are quick to brag about their hometown. But different people want different things: Some people want to live close to work, others prefer a certain school district, and still others might want to reside close to a park or church. In Houston, most homeowners basically can have it all. With such low interest rates and housing prices, most people moving to Houston can afford larger homes than they ever imagined. But purchasing a home in Houston is a little different than in other areas, so it helps to create a professional team that can make the home-buying process fun and exciting for the homebuyer.

Statistics About Houston Housing
Before purchasing a home in Houston, newcomers might want to know a little about the Houston housing market. In Houston:
• The median price for a home in 2004 was $135,000, 27 percent below the November 2004 nationwide median.
• In 2004, real estate agents sold more than 72,015 properties – exceeding the record year of sales in 2003 by more than 10 percent.
• There are more than 5,000 neighborhoods and subdivisions.
• Local home builders built a record setting 42,000 single-family homes in 2004.
• The Houston Multiple Listing Service tallied more than $12.2 billion in closings in 2004 (not including closing costs or inspections).

Choosing A Real Estate Agent
When moving to a new location, newcomers may have difficulty finding their dream home without help. Before moving to Houston, a homebuyer might want to find a real estate agent who is a relocation specialist or a buyer's agent.

A relocation specialist specializes in helping people move to a new area. Many relocation specialists are available through nationwide real estate brokerages. The buyer simply needs to call a large real estate broker with whom he feels comfortable, and the company will help find a relocation specialist in Houston. Also, many large companies offer this service as part of their relocation package.

Another option is to utilize the services of a real estate agent in Houston who is an Accredited Buyer Representative (ABR) or a buyer's agent. A buyer's agent is someone who represents only the buyer's interests in the negotiations.

Before making a decision, the buyer needs to interview the real estate agent and ask some of the following questions: Is the agent a Realtor®? How long has the agent been a Realtor®? How many transactions did the agent participate in last year? Does the agent work part-time or full-time hours? How does the agent communicate with clients? With how many clients is the agent currently working? Is the agent an ABR?

Different answers to these questions will satisfy different people – one homebuyer might want a real estate agent who is Internet savvy, while another will want someone with only a few clients. Each of these questions is designed to give the homebuyer valuable insight into how a specific agent works with clients and their families.

Creating The Right Team
One of the real estate agent's primary roles is to help the potential homeowner create the best team for the entire home-buying process. Think of the agent as the coach of the team, with the prospective homebuyer playing the role of manager with the other members of the team as players. To purchase a home, a potential homeowner typically will need the real estate agent (team coach) and the mortgage company, title company, different inspectors, insurance company and, depending on the transaction, an attorney operating as the players.

As the coach of this team, the agent's primary role is to make sure the soon-to-be homeowner is ready to sit down at the table on signing day. This role is very time consuming and involves several steps. Home buyers should expect the agent to:

• explain how the property tax system in Texas works;
• help the buyer create a budget that will ultimately set the home price;
• explain zoning, deed restrictions and homeowner's associations;
• describe the Texas homestead and community property laws;
• help determine whether to purchase a new home or a resale home;
• show potential homeowners neighborhoods and homes within their price range;
• negotiate the best possible price for the home;
• explain the contract;
• be present with the potential home owner for all inspections; and
• help expedite the paperwork between all parties involved.

Houston Property Taxes
Harris County is a large county with several taxing authorities. The home’s location will determine which taxing authorities are applicable to that situation.

One taxing authority that newcomers hear about but seldom understand is the municipal utility district (M.U.D.). These groups are established to provide water, sewer and drainage services to specific Houston area neighborhoods. Not all M.U.D.s are active, so a buyer's taxes will depend on where his or her home is located in the region.

School districts, community colleges and cities and counties may tax for their services. For example, a person who lives within Houston's city limits could be taxed by the Harris County Tax Assessor-Collector’s Office for the Houston Independent School District and Houston Community College.

Texans also may claim an annual homestead exemption of up to 20 percent of the total assessed value of their property. All homeowners may qualify for a school tax homestead exemption of as much as $15,000 on the value of the home for school district tax purposes. According to the Harris County Appraisal District, Harris County currently provides a 20 percent optional homestead exemption to all homeowners. If a home is valued at $100,000, for example, the exemption will reduce its taxable value for Harris County taxes to $80,000.

In addition to the exemptions listed above, any taxing unit, including a school district, city, county or special district, may offer an exemption of up to 20 percent of a home's value. The amount of an optional exemption can't be less than $5,000, no matter the percentage. For example, if the home is valued at $20,000 and the homeowner's city offers a 20 percent optional exemption, the exemption would have to be valued at $5,000, even though 20 percent of $20,000 is $4,000.

The governing body of each taxing unit decides whether it will offer an exemption and at what percentage. This percentage exemption is added to any other homestead exemptions for which the applicant qualifies. But a homeowner must apply in order to receive the exemption. Senior citizens and handicapped community members also may receive separate exemptions from their local taxes, but different exemptions and rules apply.

Financing The Dream
The lender sets the maximum amount that the institution will lend to the buyer in the form of the mortgage. Before looking at homes, the buyer should obtain a preapproval letter from the lender. This lets the seller know that financing already is in place and the buyer is serious about the transaction.

To obtain approval, the lender will request a list of documents that give a snapshot of the buyer's current economic condition. This is the area that usually makes people the most uncomfortable, yet it should not. Many lenders have changed the old rules requiring the buyer to place 20 percent down on the home and have a stellar credit record. The federal government and lenders even have created special loan opportunities designed to fit different lifestyles and credit records.

Before applying for a home loan, the buyer needs to be prepared and armed with a copy of his or her credit report. This will eliminate any surprises when talking to a loan officer. It also will allow the consumer to verify the information on the report and clean up any errors that might exist before applying for the loan.

In addition to the amount of the loan, the buyer needs to pay special attention to the interest rate. Lower rates enable the buyer to reasonably afford a more expensive home without becoming “house poor” – a condition in which the homeowner can afford the house but little else.
If possible, buyers should steer clear of "origination points," which lenders use to cover the expense of making a loan. According to, one point equals 1 percent of a mortgage loan. To help lower the interest rate of the loan, the buyer might want to “buy down” the points by paying upfront for a lower interest rate. Also, points paid are tax deductible from federal income taxes for the year in which they are paid; however, if the seller pays any of the points – a popular negotiation tactic – both the buyer and seller need to agree on the deduction before it is taken.

Another major factor in the mortgage is the type of loan the buyer secures. Four basic sources of loans are available in Houston:

— Conventional
This is the traditional 15- or 30-year home loan type of loan plus such variations as jumbo loans (loans for more than $240,000), conforming loans (loans under $240,000) and adjustable rate mortgages (ARMs).

— Veterans Administration (VA)
VA loans, quite popular in Texas, are funded partially through the Veterans Administration. The VA recently expanded its qualifying criteria to include more veterans, so all vets should contact the VA for the most current information. Texas veterans also can contact the Texas Veterans Land Board for loans created by the state legislature specifically for them.

— Department of Housing and Urban Development (HUD)
This federal agency oversees the Federal Housing Administration (FHA), Fannie Mae and Freddie Mac. Programs created through HUD and these other agencies meet the special needs of certain Americans and include loans specifically for teachers, policemen, firemen, senior citizens, people with disabilities, first-time homebuyers, religious groups and emerging markets.

— Other Loans
There are other special loans designed to make housing affordable for all Americans. Each program has different requirements, and not all of them are salary-related. Some of the national programs are:
• Alliance Housing Assistance Program,
• AmeriDream;
• CHAPA Homebuyer Gift Program;
• Neighborhood Gold;
• NeighborWorks;
• The Genesis Program; and
• The Nehemiah Program.

— Local And State Programs

• Fort Bend Revitalization Projects
• Housing Opportunities of Houston
• Houston Housing Finance Corporation
• Texas Affiliation of Affordable Housing Providers
• Southeast Texas Housing Finance Corporation

Typically, if the new homeowner's down payment is less than 20 percent, the buyer will need an escrow account. The lender automatically will place a portion of the homeowner's monthly note into an account specifically designated to pay for insurance and taxes, and the mortgage company is responsible for paying the annual bills from that account.

Creating A Housing Budget
The real estate agent also can help buyers create housing estimates that fit within their budget. By “backing into” the price of the home, the buyer should be comfortable with the purchase of the home. Based on numerous factors – including salaries, amount available from the lending institution, the buyer's debt and budget, the amount available for the down payment and the interest rate – the agent will help the buyer create a maximum price for the home. This number probably will be less than what the lending institution offers. The agent also will factor in taxes, insurance and any renovations (if needed) to give the buyer a firm budget with which to plan. Also, if it is important to the buyer, the real estate agent can help budget for curtains, new furniture and any minor repairs planned for the home.

Zoning, Deed Restrictions And Homeowner’s Associations
Most cities in the United States have zoning laws. Houston does not. Instead, Houston relies on deed restrictions created by the developer and enforced by neighborhood homeowners' associations. Deed restrictions are a set of rules outlining reasonable property use and are recorded in the Harris County deed records. New residents need to read the deed restrictions before they purchase the property and a real estate agent should automatically provide them as soon as the buyer becomes serious about a property.

Through deed restrictions, the new owner automatically becomes a member of the homeowners' association – and, if specified within the rules, will be held responsible for the payment of annual fees for the upkeep of the neighborhood's common areas.

Homestead And Community Property Laws
Texas is a “homestead” state, which means legislators created laws to protect homeowners from a forced sale of their home for the payment of debts. However, homeowners can lose this protection if they default on a mortgage, home improvement contract or property taxes.

Texas also is a community property state, which means that any property acquired by
a husband and wife is held jointly. The exception to the rule is when one spouse purchases property using funds held separately from the marriage.

When To Buy And When To Build
Many buyers are not sure whether to purchase an older home or to build a new one. Different factors play a big role in this decision. The real estate agent will discuss location preferences, the buyer's wants with regard to repairs, the budget, neighborhood preferences, time constraints and home styles. If the client wants everything brand new, then building might be the best bet; however, if the buyer is looking for a neighborhood with mature trees and homes with older characteristics, one of Houston's established neighborhoods might just be the ticket.

Viewing Homes
This is the fun part of purchasing a home. Houston's real estate market has every style of home imaginable, from colorful Victorian homes in The Heights to wooded, front-porch communities in The Woodlands to sprawling ranch-style homes in the Memorial area, and the buyer can see it all from the comfort of his own living room. Houston is one of just a few cities in the country where potential buyers can view details of just about every home for sale via the Internet. With more than 40,000 properties from which to choose, a buyer can use the Internet to select favorite styles of homes and neighborhoods, and even sort by price range and chosen locations.

The Houston Multiple Listing Service, available through the Greater Houston Partnership Web site ( and the Houston Association of Realtors' (HAR) Web site (, is one of the most popular home search sites; however, all real estate agent Web sites in Houston have access to the same listings.

Once the buyer expresses interest in different homes, the real estate agent will schedule viewings. Depending on time constraints, an agent typically will schedule three to four showings at one time within one area. This allows the buyer to see different neighborhoods and their proximity to work, schools, parks and any other places the buyer deems important. Some buyers say they know they've found their dream home the minute they walk in the door; yet they still need to take time to find the best home to fit their needs as a family.

Negotiating The Transaction
According to the National Association of Realtors®, this is where consumers believe the real estate agent “earns his or her commission.” The buyer wants the agent to be a tough, yet gracious, negotiator who will obtain the best purchase price possible.

All agents have their own methods of negotiation and will already have a good idea of what the market will bear before negotiations begin. Most real estate agents will research the sale price of other, similar homes that sold recently in the area. In addition to the comparative market analysis, an agent will account for and explain to the buyer the various nuances of the different streets in the neighborhood. Yes, prices in neighborhoods can vary street by street, section by section.

The real estate agent will present the homebuyer's official offer to the seller's agent. The buyer's offer might include several contingencies such as leaving the refrigerator or washer and dryer, including a home warranty, taking care of major or minor repairs, or even paying part of the points at closing. If the seller accepts the offer, the buyer will need to place “earnest money” into an escrow account to demonstrate serious interest in purchasing the home. The typical escrow amount is $2,000 but may be as little at $1,000 or even a percentage of the purchase price.

Most everyone knows to use an inspector when purchasing an older home, but even new-home buyers need to use a home inspector. Even considering the quality reputation of Houston's home builders, buyers still need to protect themselves. And a very thorough inspection is the best way to accomplish that. The homebuyer pays for each inspection. Typically spending at least one hour for every 1,000 square feet of home, an inspector will examine the roof, main electrical panel, foundation, windows, doors, faucets, air conditioner, electrical receptacles and major kitchen appliances. Upon completion, the inspector will walk the buyer and real estate agent through the home to explain any necessary renovations or flaws in the home. Most agents will have good knowledge of the area and should explain any home flaws common to the neighborhood.

The inspector might also recommend further inspection in areas such as plumbing, electrical, termites, foundation or air conditioning. These specialized inspectors can provide specific information on the condition of the problem area and provide a home repair estimate. The cost of these repairs might also give the real estate agent leverage to either negotiate a lower price for the home or have the current homeowner pay for necessary repairs.

Insurance Companies
—Title Insurance
Title companies provide a very valuable service during the home-buying process. The title company researches abstract or actual deed records, lawsuits, tax records, liens and other documentation to make sure no one else has an ownership claim against the property. Once the title company determines a clear title, it will issue an insurance policy to the mortgage company and the buyer to guard against any title defects that might show up later. By law, the homebuyer chooses the title insurance company and the State of Texas sets the insurance rates. Mortgage companies mandate the purchase of a title policy to cover the amount they are lending the buyer in case an unknown heir or other problem surfaces later. By law, Texas homeowners are automatically covered by title insurance unless the buyer signs a waiver rejecting the insurance.

In addition to researching the title to the property, an escrow officer from the title company will work with all parties involved to gather the necessary documents for the closing to take place. These documents include everything from a survey map to the Truth in Lending Statement to the Promissory Note.

The title company also serves as the host on closing day. Often the real estate agent, buyer, seller and title representative will meet at the title company to sign the closing papers. After all papers are signed, the title company will file the necessary documents with the county to validate the sale.

— Homeowner’s Insurance
No matter the location, new homebuyers always need homeowner's insurance. And if utilizing the services of a mortgage company, insurance is mandatory. In Texas, as soon as an offer is accepted on the home, the buyer needs to purchase insurance. Once again, a real estate agent should be helpful in this process, providing a current list of major insurance companies writing policies in Texas. Before purchasing insurance, the homebuyer needs to review the Texas Department of Insurance's Homeowners Rate Guide. This guide explains the types of insurance available in Texas and gives buyers a ballpark estimate of what the insurance will cost. Through the Texas Fair Access to Insurance Requirements (FAIR) program, the state also makes insurance available to people who have a problem finding coverage.

— Flood Insurance
In 2004, the Harris County Flood Control District released a new 100-year flood plain and watershed map for the entire area, which means some neighborhoods previously exempt from mandatory flood insurance now need it while other previously covered neighborhoods no longer require it. So buyers should check with the real estate and insurance agents to research the home. The State of Texas mandates that the seller provide a disclosure statement revealing any past flooding problems and all corrections made to the home. Many experts maintain that homes anywhere in the Houston region should be insured against flood damage.

Purchasing a home typically is the single largest investment most people will make in their lifetime. This is one good reason to have an attorney review and explain all of the documents before the signing. The buyer's real estate agent can recommend a good real estate attorney.

Houston is known for its excellent home prices, and most people who move here are truly and happily surprised to find they can afford their dream home. If the buyer is careful and chooses an excellent and well-qualified team, purchasing a home can be a fun process.

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