Clearing Up Home Buying Confusion

mortgage interest deduction and cash buyers

I read an article recently in The Residential Specialist, a real estate industry magazine, which described some things related to purchasing a home that many buyers were confused about. I thought it would be good to bring them up here.

The Problem Spots

41% of buyers surveyed think it is required to purchase Private Mortgage Insurance (PMI) regardless of the amount of the down payment.

Answer: PMI is typically only required if the purchaser puts less than 20% down.  Basically the lender believes borrowers with less skin (money) in the game are a higher risk of default. PMI is a type of insurance that protects the lender from this kind of loss.

56% of buyers surveyed believe the appraisal determines if the home is in good condition.

Answer: It is the purpose of the inspections to determine what condition a home is in, which may include a Contractor’s Inspection, Pest Inspection, Sewer Inspection etc.  The appraisal is paid for by the borrower but is information for the lender to determine if the purchase price is reasonable.  The appraisal does not determine whether the property is an specific condition.  It is also important to remember the appraiser typically works a very large area, think San Francisco, Sonoma, Palo Alto, San Jose, and therefore is not an expert in any given neighborhood as the realtor may very well be.

37% of home buyers thought Homeowner’s Insurance is optional.

Answer: If the home buyer plans on borrowing money, the lender will require Property Insurance to be in place before they fund the loan and allow escrow to close. The lender wants assurance the collateral won’t be lost in a fire for example.

47% of buyers surveyed believed they owned the home after the purchase contract was signed.

Answer: Ratifying the purchase contract merely begins the process, including escrow, after which ownership transfers. Having a ratified purchase contract allows a buyer to have the time they need to do inspections and secure financing without the potential of the home being sold to another person.