We have all experienced the feeling. We make a purchase and then it sets in, "buyers' remorse." What greater feeling of uncertainty grabs us than that of a purchase of a home and to possibly think that we may have made the wrong decision? The joy and euphoria that come from seeing the home of our dreams for the first time and the realization that an offer has been accepted and we have a binding contract are worlds apart. Reality sets in! We are asked to qualify for a loan, inspect the property, have the property appraised, jump through a myriad of hoops and finally required to put up a considerable amount of money so that we can make monthly payments for what seems to be the rest of our lives.
This being said, we do know the benefits of homeownership. We know the security that it produces. We feel comfortable knowing that it is our property and for the most part we can do with it what we will. We also know that current tax laws give the homeowner definite tax advantages. Homeownership links us more fully to our community as citizens. We hopefully participate more fully in the community and are more aware of the needs of our city or locality. Along with this greater attachment, homeowners also bear the majority tax burden to fulfill the community's necessities.
As we ponder the purchase of a home, many of us will know the monthly payment, fire insurance premium, downpayment and closing costs etc. That is a fine first step in evaluating our qualification to buy a home. It is an important starting point to decide whether a home purchase is in our best interest. For many of us, however, there are times that we come up short in an area or two of the above monetary requirements for purchase. This happened to a current client. The couple was short of the purchase money requirements (downpayment and closing costs) and yet the purchase of a home was in their best interest. Their tax burden was substantial. They are currently renting. They also had some credit problems in the past that would not allow them to qualify for a "no downpayment" purchase loan. They could qualify for a 5% down program and were preapproved.
As a recommendation, I informed the buyers that the seller can pay some of their closing costs. This payment by the seller, of what is normally called nonrecurring closing costs, is allowable by lenders and will be documented on the escrow issued closing statement. Most lenders allow 3-6% of nonrecurring closing costs paid by the seller. This figure is determined by the amount of downpayment the borrower is bringing to the purchase transaction. Typically a 5% downpayment brought in by the borrower will permit the seller to pay up to 3% of the closing costs. Non-recurring closing costs would be defined as those that are not ongoing.
Costs that cannot be paid by the seller are taxes, fire insurance and private mortgage insurance (PMI in this case. Non-recurring can be defined as a one time charge to the borrower for the purchase of the home including the costs to obtain the loan. Determining the above suggestion was viable, the buyers proceeded to make an offer (through an agent) on a home. Escrow was opened and the process was started to obtain the loan and fulfill the contract.
The contract did state that the sellers were to pay 3% of the nonrecurring closing costs. A purchase price was on the contract. This purchase price was given to our appraiser who did his research on value before visiting the property for the physical inspection. The appraiser called me before he viewed the property and said that based on his comparables there was a good chance we would not appraise for the value agreed upon. I called my clients and their agent with this information and they decided to continue with the full appraisal. Most purchase contracts have a contingency clause that the property is to appraise for the agreed upon purchase price. This contingency was in this contract. The full appraisal did not change the situation, the property appraised for less than the purchase price. Our buyers rescinded the contract. There was a great disparity between the appraised value and purchase price.
What caused this to happen? The buyers, unfortunately, became emotionally involved in the transaction and overpaid for the sellers' concessions offered. Their decision was not based on reality and they did not exercise the proper judgment to protect their financial interests. This was the admission of the buyers. They depended on someone else.
Previously, I noted that the responsibility of a buyer or borrower to himself or herself goes beyond the obligation just to bring money to the close of escrow. The buyer and/or borrower must protect his assets. There should be an awareness of what is happening in the transaction and questions should be asked. The only way to feel confident that "buyers' remorse" will not set in is to know as much as possible about the deal and verify the numbers to your complete satisfaction. Fortunately, in this industry there is a substantial amount of documented information available to the public allowing us to make a decision. It is available just for the asking. It is up to us to make appropriate use of it.
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