Should I wait to buy a home in Denver? Isn’t the bubble bound to burst?
It depends on your situation. If you are waiting due to an anticipated salary increase or have a savings goal for a down payment, then waiting will play to your benefit. (Reach out to my partner Tim Tacl if you want some guidelines on how much to save for a down payment.)
If you are waiting for prices to come down or for a bubble to burst, that is a gamble. My newsletters always contain the latest data from our preferred title company which will inform you about current market conditions to help you make an informed decision, but beware that waiting too long may mean you are priced out of the market within a few years. I am a firm believer in the philosophy that “time in the market beats timing the market.” If you have the means to own a home, that is a huge step you can take to secure your financial future and build equity. If you wait, you not only may be priced out of the market (or at least your preferred neighborhoods) but you’re also missing out on building that equity - which will accumulate fast once you begin your mortgage payments. Wouldn’t you rather spend the money going towards rent on something that will pay you back?
As far as a bubble burst on the horizon, what we are seeing now in the market is a simple equation of supply and demand. There is only about ½ month’s supply of inventory for the current demand, so we have quite a runway to gain before we have a balanced market let alone a bubble.
How much is the deposit to buy a house?
The deposit amount, called earnest money, is the amount buyer puts in escrow once going into contract. The money serves as a “good faith” deposit that the buyer will do what they can to hold up their end of the deal. If they break the contract prior to closing, the earnest money amount may be rewarded to the seller. Note that there are many times throughout the escrow process where the buyer can back out of the contract without breaking terms, in which case their earnest money would be returned.
The earnest money amount is determined by seller side and is usually around 1% of purchase price.
How much does it cost to use an agent?
The commission for both agents is traditionally paid by the seller, deducted from the proceeds of the sale. The standard commission is 6% of sales price, with 3.2% going to the listing agent and 2.8% going to the buyer’s agent. While this is industry standard, these numbers are negotiable and not mandatory. The seller can determine the commission they are willing to pay - less than 6%, more than 6% (if they feel so inclined!), and/or the split between the two agents can differ.
When the buyer signs the exclusive contract with their agent, they can indicate that should something fall through with the commission from the seller, the buyer will pay their own agent’s commission. This is not required but is always a nice courtesy to indicate that should something happen, you will provide some amount of compensation to your agent. You will know prior to making an offer if the seller is indeed paying the buyer’s agent commission per usual and what the percentage amount is.
The most common cause for any commission agreement contradicting these norms is if a discount brokerage has been hired to sell the home. In recent years these discount brokerages have gained market share by offering one low flat rate (typically just 1%) to sell your home. While this may sound enticing, there are some things to take into consideration before using one of these companies.
A discount brokerage is designed to sell a high volume of homes quickly, making up for the low commission by having high volume and turnover. The commission paid to the buyer’s agent in these transactions is VERY low (often a couple hundred dollars). Therefore, most agents do not like these companies as they force them to discount their services, leading to reduced showings and more days sitting on the market.
How do I choose a lender/mortgage provider?
It may come as a surprise that when it comes to mortgages, it is usually best to use a small, local lender rather than a big national bank. This is because a local lender that specializes in mortgages is going to be leaner, meaner, and more specialized. The loan officers at these companies are most often commission and referral based, so they are committed to providing a high touch experience and getting your loan closed on time. They work seven days a week and provide more personalized service, such as calling the listing agent on your behalf when you make an offer. These calls help your offer stand out because the listing agent is able to see that you come with a motivated, communicated lender who will work hard to get the deal done. There are circumstances where listing agents will choose these lenders over a large national bank because they have confidence the deal will close on time.
In contrast, a large bank is providing mortgages as one sliver of multiple services they offer. They aren't relying on servicing mortgages in order to survive - they are a bank first. Their agents typically have a set salary and set hours. If you need a question answered at 7pm but they've clocked out at 6pm, you'll have to wait until the next day when it's your turn in the queue. Big banks have overlays on their conditions and usually ask for more items from the clients as well.
However, different products are better at different places. One exception to the above rule is that jumbo rates (for loans in the $500K+ range) are sometimes better at a big bank, but conventional rates (less than $500K) are usually very close if not better at a small lender.
It's important to note that you can always shop rates and try to get price matches. While each lender will pull credit, it shouldn't affect your score too much since all inquiries are related to the same purchase. Your real estate agent should be able to recommend 2-3 loan officers they trust.
What is an escrow account?
Most lenders require you to pay in advance for some items that will be due after closing. These prepaid items generally include homeowner’s insurance premiums and property taxes. The first page of the Loan Estimate indicates whether or not an escrow account is required and estimates the amount of your monthly escrow payment.
What is title and what does it mean for me?
Title is the legal right to own, use, and dispose of land. It refers to the current owner as well as all previous owners. Prior to legally transferring property, a title search must be conducted to confirm the new owner has free and clear ownership of the land in question. A title company handles the escrow account and all paperwork required between buyer and seller while under contract. Title insurance protects against the possibility of future loss should there be an unexpected challenge to your ownership.
The title company is responsible for impartially carrying out instructions given by the buyer and seller (ie. concessions given during inspection or appraisal negotiations, insurance policies, terms of sale, etc) and work together with the lender to check all the boxes necessary to complete the sale. They receive all money and documentation required to complete the transaction and coordinate final delivery of funds and documents to complete the transaction at closing. The title company charges a fee for these services, which in Denver is typically split between buyer and seller.
What does it take to qualify for affordable housing?
Many first time homeowners wonder if they can apply for affordable housing. There are some definite hoops to jump, as these programs are designed to help those with utmost need. To qualify as a household, married couples must file jointly. The income threshold for a couple is about $45K/year. There is an income chart that the listing agent can provide outlining specific requirements for the property in question.
You must be approved to qualify to live in these homes and I advise my clients that even if you do qualify they don’t make much sense as an investment because the community puts a limit on the appreciation of the property, so it’s essentially just a notch above renting once you pay closing fees, etc.
If you look for something in that price range outside of your target neighborhood you will get the full benefits of standard homeownership such as tax incentives and equity. There are a number of mortgage programs designed to help first time homebuyers with limited means get into their first home.