| How to Be a Smart Home Buyer |
 Especially in an area as complex as Los Angeles. Where do you begin? | |
| The Smart Home Buyer: How Do I Become Smart? | Choosing a Buyer Broker: Check Credentials and More |
| Buyer Brokerage: Questions and Answers | Real Estate Dictionary: Learn the Terminology |
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| How Do I Become Smart? |
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Smart home buyers know it's important to work with a buyer broker. Smart buyers know to work with a buyer broker as a client, not as a customer. Smart buyers are careful to choose a buyer broker who has credentials, experience and a verifiable track record. |
When they've connected with the broker that's right for them, smart buyers request to sign a Buyer Broker Agreement with their buyer broker. But how do you choose a buyer broker? |
| Check Credentials and More |
| Credentials are a good place to start in choosing a buyer broker. The initials after a Realtor's name are there for a reason. Credentials indicate a broker has engaged in advanced study and passed qualifying examinations. It also means the broker has certain areas of specialization. |
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Click here for a quick look at what the credentials mean. In addition to designations, you'll want to add some criteria of your own when you're entrusting a real estate broker to guide you in what most probably is the largest single financial transaction to date in your life: Call or Email Linda to discuss why she is an advocate of buyer brokerage and how she can help fulfill all your expectations in finding your dream home. |
| Questions and Answers |
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Q: What's the advantage of having a buyer broker in a real estate purchase? A: Security. In one of the largest financial transactions of your life, it's smart to have a knowledgeable professional to represent you and your interests. Q: Why should I sign a buyer broker agreement? A: By signing a buyer broker agreement, you become a client, with all the rights, benefits and privileges created by this fiduciary relationship. The buyer broker agreement creates an agency relationship that commits the buyer broker, as your agent, to work diligently in your behalf and solely in your best interests. The buyer broker agreement also is a commitment of your loyalty to your agent. Without a buyer broker agreement, you are basically a customer. Q: Who pays the buyer broker's commission? A: The seller pays both the listing broker's commission and the buyer's broker commission out of the seller's proceeds from the sale of the property. This is not an additional cost to the seller, since both brokers share in the commission that the seller already agreed to pay at the time the seller listed the property for sale. Brokers share in the commission being offered by the seller under a cooperative arrangement called the Multiple Listing Service (MLS). Q: As the buyer, could I be responsible for paying my broker's commission? A: Perhaps, but it would be extremely rare for the buyer to be liable for paying the commission of the buyer's broker. The scenario would need to involve the buyer making a deliberate decision to purchase a property from a seller who had refused to pay a commission, or the buyer purchasing a property through another real estate agent without the benefit of representation by the buyer's broker. Q: Why have I heard that the buyer always pays the commission? A: Consumer advocates maintain that "the buyer always pays the commission" because it's paid by the seller out of the purchase price of the property. Technically, it's the buyer's money, passed through the hands of the seller, which pays the commission. Thus, they say, a buyer is foolish to "pay" without receiving buyer representation. Q: Can my buyer broker help me with "for sale by owner" properties? A: Yes. In fact, most owners who are selling a property without benefit of an agent (commonly known as FSBO's) are trying to save the listing side of the commission, and expect to pay commission to a buyer's broker. Commission payable by the FSBO seller is always negotiable, and most FSBO's are more than happy to cooperate. Q: How should a buyer deal with new home subdivisions? A: Having a buyer broker in this situation is especially critical. New home representatives, often found at model home sites, are sales people employed by the builder-developer solely to sell the employer's product and to represent only their employer's interests. New home reps rely on fancy sales talk to get a buyer's commitment to purchase with as few concessions from the builder as possible, and often will resort to all manner of tactics to discourage buyers from being represented by a buyer broker who could negotiate a much better deal for the buyer. Q: What if the property I want to buy is listed by the buyer broker's company? A: In this situation, there will be a dual agency relationship. Because you have a buyer broker agreement, you will have equal status with the seller as a client in the transaction. The company will be able to legally represent both parties and maintain a fiduciary responsibility to both you and the seller in this dual agency. By being a client (instead of just a customer), you gain equal footing as a principal to the transaction, with full rights of confidentiality and expert representation in negotiations. Q: Will I really benefit from hiring a buyer broker? A: Yes. Having a broker representing you and your interests certainly gives you the cutting edge in a real estate purchase. Business Week Magazine (Sept. 11, 1995), reports that an employee survey conducted by Sprint in 1991 showed ". . . employees who used buyer brokers saved an average of 9% off the asking price, vs. 3% for all home buyers." And there are other important terms beyond just price that your buyer broker will be able to negotiate for you. |
| Learn the Terminology |
| Learning some of the terms you may encounter in a Southern California real estate transaction will be a big help. Remember that real estate terminology can differ from region to region and state to state. |  |
 ADJUSTABLE RATE MORTGAGE (ARM) A mortgage with an interest rate that adjusts periodically based on a pre-determined index and margin, often subject to caps on periodic and life-of-loan increases. Also referred to as a variable rate mortgage. AGENT One who works for or in behalf of another by authority. AMORTIZATION The periodic reduction in principal of a loan. AMORTIZATION SCHEDULE Charting of anticipated reduction in principal balance of a loan based on regular periodic payments over time. ANNUAL PERCENTAGE RATE (APR) A governmentally-devised means of showing how costs of borrowing compare when reflected as a yearly rate. An APR is usually higher than the actual quoted rate or note rate because it takes into account points and other credit costs. ASSUMPTION Taking over a loan and becoming personally liable for the repayment. Also sometimes referred to as "subject to." BALLOON PAYMENT One large payment due at a specified time to pay off a short-term fixed-rate loan whose periodic payments are insufficient to pay both interest and principal balance in full. BANKRUPTCY A provision of Federal Law whereby a debtor surrenders assets to the Bankruptcy Court and is relieved of future obligation to repay unsecured debts. After bankruptcy, the debts are discharged and unsecured creditors may not pursue further collection efforts. Secured creditors, including those holding deeds of trust or judgment liens, continue to be secured by the property, but may not take other action to collect from the debtor. BENEFICIARY A person named to receive a benefit. BROKER, MORTGAGE One who brokers mortgages. A mortgage broker does not make loans or lend money, but instead, brokers loan packages to secure financing in behalf of a borrower for a fee. BROKER, REAL ESTATE A real estate broker has a real estate broker's license (as opposed to a sales person's license) after having met education and experience criteria and passing a broker's license exam. A broker must take continuing education courses in order to renew the broker's license at certain intervals. BUY-DOWN A term referring to the paying of advance interest ("points") to reduce the interest rate of a loan. A buy-down can apply to the first few years of a loan, or can reduce the rate over the life of the loan, depending on the loan program and points paid. CAPS Limits on the amount the monthly payment and/or interest rate can increase for an adjustable rate mortgage. CERTIFICATE OF ELIGIBILITY The document given to qualified veterans which entitles them to VA guaranteed loans. A certificate of eligibility is obtained by submitting the veteran's form DD-214 to the local VA office with VA form 1880 (Request for Certificate of Eligibility). CERTIFICATE OF REASONABLE VALUE (CRV) An appraisal issued by the Veterans Administration showing the property's current market value CLOSING Closing of a real estate purchase transaction in California is deemed to have occurred when the deed conveying ownership to the buyer of the property is recorded with the County Recorder's Office. CLOSING COSTS Buyers' closing costs are those associated with purchasing a property, including costs of obtaining a mortgage loan. Sellers' closing costs are those associated with selling a property. Buyers' closing costs are usually paid into escrow several days prior to closing. Sellers' closing costs usually are deducted from the seller's proceeds at time of closing. COLLATERAL Property pledged to secure a loan. COMMISSION Compensation paid to a real estate broker upon completion of a transaction. Commission can be expressed as a percentage or fixed dollar amount. COMMITMENT A promise by a lender to make a loan on specific terms or conditions to a borrower. COMMUNITY PROPERTY A way for a husband and wife to hold title to property in California. Has no automatic right of survivorship. After July 2001, California will have another form of vesting known as "Community Property with Right of Survivorship." CONDOMINIUM A system of individual fee simple ownership of portions (units) in a multi-unit structure or development, combined with joint ownership of common areas. Each individual may sell or encumber his own unit. CONSTRUCTION LOAN A short term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses. COVENANTS, CONDITIONS AND RESTRICTIONS (CC&R's) Written governing agreements limiting the use and other aspects of property. Homeowner Associations for common interest subdivisions, including condominiums and planned developments, normally are bound by and enforce CC&R's. CONVENTIONAL LOAN A mortgage not insured by FHA or guaranteed by the VA. CREDIT REPORT Report documenting credit history and current status of a borrower's credit. DEBT-TO-INCOME RATIO The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her net effective income (FHA/VA loans) or gross monthly income (conventional loans). DEED The written document conveying real estate ownership. After a deed is recorded with the County Recorder, the original deed is not needed to convey title in the future. DEED OF TRUST A voluntary lien to secure a debt. A deed of trust deeds the property to trustees who foreclose and sell the property at public auction in the event of default on the note which the deed of trust secures. DEFAULT Failure to meet legal obligations in a contract, including failure to make the monthly payments on a mortgage. DEFERRED INTEREST When a mortgage is written with a monthly payment that is less than required to satisfy the note rate, the unpaid interest is deferred by adding it to the loan balance. DELINQUENCY Failure to make payments on time. DEPARTMENT OF VETERANS AFFAIRS An independent agency of the Federal Government which guarantees long-term, low-or no-down-payment mortgages to eligible veterans. DIRECT LENDER A lender who makes mortgage loans directly to borrowers. While direct lenders may sell their mortgages into the secondary mortgage market, they do not "broker" loans. Most direct lenders also "service" their loans. DOWN PAYMENT Money paid to make up the difference between the purchase price and the mortgage amount. Down payments usually are 3 percent to 20 percent of the sales price on conventional loans. DUE-ON-SALE CLAUSE A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home or otherwise conveys title to the property without the lender's consent. EARNEST MONEY DEPOSIT Money given by a buyer with a purchase offer to bind a transaction. An earnest money deposit in Southern California is normally three percent of the purchase price of the property. The earnest money is usually deposited with an escrow holder. EASEMENT The right to use the land of another for a specific limited purpose. EMINENT DOMAIN The power of the state to take private property for public use upon payment of just compensation. ENCROACHMENT The physical intrusion of a structure or improvement onto the land of another. Examples include a fence or driveway over the property line. EQUITY The value an owner has in real estate over and above obligations against the property. EQUITY SHARING Form of joint ownership between an owner/occupant and an owner/investor. The investor takes depreciation deductions on a share of the ownership. The occupant receives a portion of the tax write-offs for interest and taxes; a part of occupant's monthly payment is treated as rent. The co-owners divide profit upon sale of the property. ESCROW A neutral third party designated to collect and hold all documents and monies required for closing of a real estate transaction or mortgage loan refinance. FEDERAL HOME LOAN BANK BOARD (FHLBB) A regulatory and supervisory agency for Federally chartered savings institutions. FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) "Freddie Mac" provides a secondary market for mortgage financing by purchasing conventional loans. FEDERAL HOUSING ADMINISTRATION (FHA) A division of the Department of Housing and Urban Development (HUD). Its main activity is insuring residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages. FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) "Fannie Mae" is a secondary mortgage institution and is the largest single holder of home mortgages in the United States. FNMA buys VA, FHA, and conventional mortgages from primary lenders. FHA LOAN A loan insured by the Federal Housing Administration. While FHA loans may be the only loan option for some moderate income and first-time buyers, they are not popular with home sellers because of additional costs which often must be borne by the seller. FHA MORTGAGE INSURANCE Required on all FHA loans to help insure against loss due to loan defaults. Paid at time of loan inception and/or spread out as an addition to monthly payments. The premium is also known as "MIP." FIRM COMMITMENT A promise by FHA to insure a mortgage loan for a specified property and borrower. A promise from a lender to make a mortgage loan. FIXED RATE MORTGAGE Mortgage whose interest rate is the same throughout the term of the loan for the original borrower. FORECLOSURE A legal process by which a lender forces sale of a mortgaged property because the borrower has not met the terms of the mortgage. FUNDING The lender's act of sending the loan funds by wire or check prior to closing. GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) "Ginnie Mae" provides sources of funds for residential mortgages insured or guaranteed by FHA or VA. GRADUATED PAYMENT MORTGAGE (GPM) A type of flexible-payment mortgage where payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it. GUARANTY A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract. HAZARD INSURANCE A form of insurance which protects the insured from specified losses, such as fire. HOUSING EXPENSE-TO-INCOME RATIO The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her net effective income (FHA/VA loans) or gross monthly income (conventional loans). IMPOUNDS Portion of a borrower's monthly payments held by the lender or loan servicer to pay for real estate taxes, hazard insurance and PMI (if applicable). INDEX Published rate against which lenders gauge the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as 1, 3 and 5-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average cost-of-funds incurred by savings and loans), to adjust the interest rate on an adjustable mortgage up or down. INVESTOR A money source for a lender or mortgage broker. INTERIM FINANCING Temporary financing, such as a bridge loan, to provide down payment funds for a new home before closing the sale of a prior residence; or a construction loan made during completion of a building or a project. A permanent loan usually replaces interim financing. JOINT OWNERSHIP AGREEMENT An agreement between owners defining their rights, ownership, monetary obligations and responsibilities. JOINT TENANCY A way for two or more persons to own a property. Joint tenancy with the right of survivorship means the survivor inherits the property without reference to the decedent's will. Creditors may sue to have the property divided to settle claims against one of the owners. JUMBO LOAN A loan which is larger than the "conforming loan" limits set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Because jumbo loans cannot be funded by these agencies, they usually carry a slightly higher interest rate. LIEN A claim, charge or encumbrance against a property. A lien must be removed to clear title. LOAN-TO-VALUE RATIO The relationship between the mortgage loan amount and the appraised value or sales price of the property, whichever is less, expressed as a percentage. MARGIN The amount added to the index on an adjustable rate mortgage to establish the amount the interest rate can be adjusted. MARKET VALUE Theoretically, the highest price a buyer would pay and the lowest price a seller would accept on a property within a specified time frame. MORTGAGE A voluntary lien filed against property to secure a loan. MORTGAGE INSURANCE PREMIUM (MIP) The equivalent of PMI for FHA-insured loans. MORTGAGEE The lender. MORTGAGOR The borrower or property owner who has placed the property as collateral for the loan. NEGATIVE AMORTIZATION Occurs when monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. Negative amortization could result in a borrower owing more than the original loan amount. NET EFFECTIVE INCOME The borrower's gross income minus federal income tax. NON-ASSUMPTION CLAUSE A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender. NOTE A written promise to pay a certain sum of money by or at a certain time. ORIGINATION FEE The fee charged some lenders to originate a loan. Usually equals 1 percent of the loan amount. PLANNED DEVELOPMENT Also known as a "planned unit development." Similar to a condominium except that ownership normally includes the land beneath the structure. PITI Principal, Interest, Taxes and (Hazard) Insurance. When combined with PMI, if any, this is also referred to as monthly housing expense. PMI (Private Mortgage Insurance) Money paid by the borrower to insure the mortgage lender against default when the borrower's equity in the property is less than 20 percent (in a purchase, when the down payment is less than 20 percent). POINTS Prepaid interest assessed prior to loan inception by a lender. A point is equal to 1 percent of the loan amount (1 point on a $200,000 mortgage would cost $2000). Points can be used to "buy down" the interest rate. POSSESSION In Southern California, possession means the right to take occupancy of a property. POWER OF ATTORNEY A written document signed before a notary authorizing another to act on his or her behalf as an Attorney in Fact. A Specific Power of Attorney is usually needed to empower another to sign legally binding documents (such as loan papers) in a real estate transaction in California. PRELIMINARY TITLE REPORT The offer by a title insurer to issue a policy of title insurance, including the terms and conditions under which such a policy will be issued. PRE-PAIDS Money needed at closing to initially fund an impound account, purchase the initial one-year hazard insurance policy, pay a partial month's loan interest in advance and/or prorate real estate taxes, homeowners association dues, rents, etc. between buyer and seller. PRE-PAYMENT A privilege in a mortgage permitting the borrower to make larger-than-required payments or to pay the loan balance in full prior to its due date. PRE-PAYMENT PENALTY A charge imposed by a lender for making excessive advance payments or paying off a loan early. PRIMARY MORTGAGE MARKET Lenders who make mortgage loans directly to borrowers but often sell their mortgages into the secondary mortgage market. Primary lenders include savings and loan associations, commercial banks and mortgage companies. Primary lenders often retain the "servicing" of loans, collecting payments and handling impound accounts. PRINCIPAL The amount of debt, not counting interest, owing on a loan. PRIVATE MORTGAGE INSURANCE (PMI) Insurance for a lender against the possibility of default by a borrower who has less than 20 percent equity in a property. While PMI is normally required to be paid by a borrower for a first deed-of-trust in excess of 80 percent, most borrowers opt for a "piggyback" loan if they have at least 10 percent equity in order to avoid PMI. QUITCLAIM DEED A deed releasing whatever interest a person or other entity may have in a property but making no warranty whatsoever. A quitclaim deed is often used by a spouse in a community property state such as California to quitclaim any implied community property interest the spouse may have in a property owned or being acquired by the other spouse as his or her sole and separate property. REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA) A Federal law that allows consumers to review known or estimated closing costs once after application for a loan, and once prior to or at closing. The law requires lenders to furnish the information only after an application has been received. REALTOR® A real estate broker or agent holding active membership in the National Association of Realtors. RECISION Cancellation or withdrawal of approval. As it pertains to mortgage refinancing, the law requires that a homeowner have 3 days' right of recision when a contract names a currently-owned primary residence as security. RECORDING FEES Money paid for recording documents, such as deed and deed of trust, with the County Recorder. REFINANCE Obtaining a new mortgage loan on a property already owned, most often to replace an existing mortgage loan. REVERSE ANNUITY MORTGAGE Form of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as the source of collateral. SATISFACTION OF MORTGAGE Most often seen in conjunction with a "reconveyance" (release of trust deed). This is technically a document issued by the mortgagee when a mortgage loan is paid in full. Also called a "release of mortgage." SECOND MORTGAGE A mortgage made subsequent ("junior") and subordinate to a first mortgage. SECONDARY MORTGAGE MARKET The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. Provides liquidity for lenders. SERVICING All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, and in the case of impound accounts, payment of taxes, insurance premiums and the like. SIMPLE INTEREST Interest which is computed only on the principal balance. SURVEY A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any buildings. SWEAT EQUITY Equity created by a property owner through work performed personally by the owner to enhance the property's value. TENANTS IN COMMON A way for two or more persons to own a property with no automatic right of survivorship. If one dies, his interest passes to his heirs, not necessarily the co-owner. Either party, or a creditor of one, may sue to partition the property. TITLE Ownership of property. Title is a term also used to refer to the company who issues title insurance. TITLE INSURANCE Insurance that provides an indemnity against loss or damage as a result of defect in title ownership to a particular piece of property. Title insurance covers mistakes made during a title search as well as some matters which could not be found or discovered in public records such as missing heirs, mistakes, fraud and forgery. TITLE SEARCH An examination of public records to determine the legal ownership of property. A title search usually is performed by a title company. TRANSFER TAX Tax charged by a governmental body when a property is sold. Los Angeles County charges a transfer tax of $1.10 per thousand of gross sales price. A few cities in LA County charge an additional city transfer tax. TRUTH-IN-LENDING ACT Federal law requiring disclosure of the Annual Percentage Rate of a loan to borrowers (also known as Regulation Z). THREE-ONE ARM Mortgage in which the borrower receives a fixed rate for three years (usually below normal fixed interest rate), after which the loan becomes an adjustable (ARM). There are variations (5/1 ARM, 7/1 ARM, 10/1 ARM). UNDERWRITING The final sign-off approval for a mortgage loan by a lender. USURY Interest charged in excess of the legal rate established by law. VA LOANS Loans guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements. VA FUNDING FEE Congressionally-approved fee charged for obtaining a VA-backed loan. VERIFICATION OF DEPOSIT (VOD) Document issued by a financial institution verifying balance of funds on deposit for a particular period of time (usually used by a lender to confirm down payment is borrower's own money). VERIFICATION OF EMPLOYMENT (VOE) Document signed by the borrower's employer verifying his/her position, salary and expectation of continued employment. WALK-THROUGH Approximately five days prior to closing, a buyer visits the property being purchased to ensure the property is in substantially the same condition as at time of contract acceptance and that any repairs agreed to by the seller have been completed. WAREHOUSE FEE Many mortgage firms must borrow funds on a short-term basis in order to originate loans which are to be sold later in the secondary mortgage market (or to investors). When the prime rate of interest is higher on short-term loans than on mortgage loans, the mortgage firm has an economic loss which is offset by charging a warehouse fee. WRAPAROUND A new loan which incorporates existing debt already securing the property. Payments made to the holder of the wraparound include payments due on the existing loan which the holder must then remit to the existing noteholder. The above is an informal guide and is not intended to provide legal or technical information. |