| Buyer Tips
Home Ownership Pays
No question about it, home ownership is a big investment, maybe the largest you'll ever make. But over time, it's an investment that pays for itself many times over. Here's how:
Tax Advantages
- Mortgage interest is tax deductible.
- Real estate taxes are tax deductible.
- Local tax benefits are available in many areas.
- You can enjoy tax-free gains up to $500,000 from the sale of a primary residence that you have occupied for two of the last five years if you are married and filing jointly. If you are single or married and filing separately, you can enjoy tax-free gains up to $250,000. Moreover, you can use the exclusion as often as you meet the qualifications.
Investment Benefits
- You build equity over time, which you take out in cash when you sell your home.
- The profits from home investment are often greater than from many other investments.
- Because you can borrow against it in most states, home equity can be a source of emergency funding.
- Land appreciation adds to the value of your home.
- For many, home ownership is an important part of retirement planning.
Personal Satisfaction
- You gain more living space.
- You enjoy the satisfaction and pride of home ownership.
- Home ownership, for many people, is a sign of independence and achievement.
How Much House Can You Afford?
Lenders usually use two basic formulas to determine how much of a mortgage you can afford. They may vary slightly depending on the lending institution you're using, but all lenders follow the same guidelines. There are many different programs available, both conventional and governmental. Your lender can work with you to find one that fits your specific financial needs.
Conventional loans, with a fixed interest rate, generally require that your mortgage expenses, which include the principal, interest, taxes and insurance (PITI) do not exceed 28% of your income. A fixed loan rate has an interest rate which is constant throughout the loan term. An adjustable rate mortgage (ARM) has an interest rate that fluctuates according to current standards. Mortgage expenses for an ARM are not to exceed 26% of your income. There is another ratio used with long-term debt. Long-term debt is considered to be any payments extending at least nine months. Your long term debt must not exceed 36% of your gross income to qualify for a fixed rate loan. For an adjustable rate mortgage, your long-term debt must not exceed 33% of your gross income. FHA (Federal Housing Administration) Loans, mortgage expenses are not to exceed 29% and your long-term debt to income ratio is to be no more than 41%. For example, if your annual income is $50,000, divide that by twelve and you have a gross monthly income of $4,166. For a conventional loan, you multiply that by 28% which equals $1,166. You should qualify for a conventional loan with payments not in excess of $1,166. The total of your monthly mortgage expense, plus any long-term debt must not exceed $1,500. ($5,000 x 36% = $1,800).
For a quick reference, refer to this chart below.
Max. Monthly Housing Expense Max. Monthly Housing Expense
+ long-term debt
Conventional
Gross Monthly Income 26% - 28% 33% - 36%
FHA
Gross Monthly Income 29% 41%
Mortgage Application Checklist
- Copy of driver's license and social security card for each borrower.
- Accepted purchase agreement and copy of listing sheet.
- Application fee in the amount of $
- Income
A: Past two years' history of employment with addresses, phone numbers and length of time on the job.
B: Past two years' W-2 forms.
C: Most recent paycheck stubs (30 day minimum).
D: Verification of other income: social security, child support, retirement, etc.
E: If self-employed: Past two years' tax returns including all schedules and a profit and loss statement for the current year signed by your accountant.
F: Copies of leases for all rental properties.
- Assets
A: Most recent statements (for 3 months) for all bank and credit union accounts
B: Stocks and bond: provide copies of certificates or most recent statements from stockbroker.
C: Approximate value of all household goods.
D: Make, model and value of automobiles, boats, etc.
- Creditors
A: Credit cards: provide account numbers and statements showing current balance.
B: Installment loans: provide account numbers, balances, monthly payments and addresses.
C: Mortgage loans: provide account numbers, balances, monthly payments and addresses on all properties presently owned or sold within the last two years. Bring proof of sale for all properties sold within the last two years.
D: Amounts for child care expense, if any.
- Landlord Information
A: Name and address of all landlords for the past two years.
- Bankruptcy And/Or Adverse Credit
A: Bankruptcy discharge and schedule of creditors.
B: Letter of explanation.
- Divorce decrees, if applicable, including property settlements, quit claim deeds, modifications, etc.
- Copy of contract or listing agreement for home you are selling.
VA Only
A: Certificate of eligibility
B: DD214
Are You Ready?
Knowledge and experience are the keys to successful real estate transactions. One of the keys to making the home-buying process easier and more understandable is planning. In doing so, you'll be able to anticipate requests from lenders, lawyers and a host of other professionals. Furthermore, planning will help you discover valuable shortcuts in the home-buying process.
Do You Know What You Want?
Whether you are a first-time home buyer or entering the marketplace as a repeat buyer, you need to ask why you want to buy. Are you planning to move to a new community due to a lifestyle change or is buying an option and not a requirement? What would you like in terms of real estate that you do not now have? Do you have a purchasing timeframe?
Whatever your answers, the more you know about the real estate marketplace, the more likely you are to effectively define your goals.
Do You Have The Money?
Homes and financing are closely intertwined. (Financing is the difference between the purchase price and the down payment, commonly referred to as debt or the mortgage.) The good news is that over the years new and innovative loan programs have evolved which require a 5 percent down payment or less. In fact, a number of programs now allow purchasers to buy real estate with nothing down. Few people can buy a home for cash. Nearly nine out of 10 buyers finance their purchase, which means that virtually all buyers -- especially first-time purchasers -- required a loan. It is suggested that consumers start the mortgage process well before bidding on a home. By meeting with lenders -- either online or face to face -- and looking at loan options, you will find which programs best meet your needs and how much you can afford. We also recommend pre-approvals for another reason: Purchase forms often require buyers to apply for financing within a given time period, in many cases, seven to 10 days. By meeting with loan officers in advance and identifying mortgage programs, it won't be necessary to quickly find a lender, check credit, and rush into a financing decision that may not be the best option.
What is “Pre-approval”?
"Pre-approval" means you have met with a loan officer, your credit files have been reviewed and the loan officer believes you can readily qualify for a given loan amount with one or more specific mortgage programs. Based on this information, the lender will provide a pre-approval letter, which shows your borrowing power. You can visit as many lenders as you like and get several pre-approvals, but keep in mind that each one carries with it a new credit check, which will show up on future credit reports.
Although not a final loan commitment, the pre-approval letter can be shown to listing brokers when bidding on a home. It demonstrates your financial strength and shows that you have the ability to go through with a purchase. This information is important to owners since they do not want to accept an offer that is likely to fail because financing cannot be obtained.
In addition to a down payment, purchasers also need cash for closing costs (the final costs associated with closing the loan). Several newly emerging loan programs not only allow the purchase of a home with no money down, but also underwrite closing costs.
Not everyone, however, elects to purchase with little or no money down. Less money down means higher monthly mortgage payments, so most home buyers choose to buy with some cash up front.
As to closing costs, in markets where buyers have leverage, it may be possible to negotiate an offer for a home that requires the owner to pay some or all of your settlement expenses.
Is Your Financial House in Order?
Those great loans with little or nothing down are not available to everyone: You need good credit. For at least one year prior to purchasing a home, you should assure that every credit card bill, rent check, car payment and other debt is paid in full and on time.
What kind of loan?
There are thousands of loans available out there from a variety of lenders, but in general, the mortgage you choose will likely be determined by at least several key factors:
- How much down? Loans with 5 percent down or less are available -- in fact, loans from major lenders with no money down have appeared in recent years.
- If you place less than 20 percent down, lenders will want the mortgage guaranteed by an outside third party such as the Veterans Administration (VA), the Federal Housing Administration (FHA) or a private mortgage insurer (PMI, or private mortgage insurance, is required by lender to protect against any mortgage defaults). Millions of VA, FHA and PMI loans are generated each year.
- How's your credit? The best rates and terms are only available to those with solid credit. To get the best loans, make a point of paying credit cards, installment payments, rent and mortgage bills in full and on time.
- Are you a first-time buyer? It might seem that "first-time buyer" means someone who has never owned property before, but under most state programs, the term refers to those who have not owned property within the past three years. State-backed first-timer programs often feature smaller down payments and below-market interest rates.
How do you get a loan?
To obtain a loan you must complete a written loan application and provide supporting documentation. Specific documents include recent pay stubs, rental checks and tax returns for the past two or three years if you are self-employed. During the prequalification procedure, the loan officer will describe the type of paperwork required.
Where do you get a loan?
Mortgage financing can be obtained from mortgage bankers, mortgage brokers, savings and loan associations, mutual savings banks, commercial banks, credit unions, and insurance companies.
What are you looking for in a home?
It's important to list the features and benefits you want in a home. Consider such things as pricing, location, size, amenities (extras such as a pool or extra-large kitchen) and design (one floor or two, colonial or modern, etc.). Next, it's important to consider your priorities. If you can't get a home at your price with all the features you want, then what features are most important? For instance, would you trade fewer bedrooms for a larger kitchen? A longer commute for a bigger lot and lower cost? Lastly, consider your needs in several years. If you'll need a larger home, maybe now is the time to buy a bigger house rather than moving or expanding in the future. If you expect your income to increase, perhaps you should consider a more expensive home financed with a loan program where monthly payments increase in the future.
Choose a Home
As a buyer, here's what actually happens. A home has been placed on the market for which the seller has established an asking price as well as other terms. In effect, this is an offer. At this point, you have three choices: accept the seller's offer and create a contract; reject it and not make an offer; or suggest different terms and make a counter-offer. If you choose this last option, the seller may accept, reject or make a counter-offer.
No aspect of the home buying process is more complex, personal or variable than bargaining between buyers and sellers. This is the point where the value of an experienced REALTOR® is clearly evident because he or she knows the community, has seen numerous homes for sale, knows local values and has spent years negotiating realty transactions.
How much to offer?
You sometimes hear that the amount of your offer should be x percent below the seller's asking price or y percent less than you're really willing to pay. In practice, the offer depends on the basic laws of supply and demand: If many buyers are competing for homes, then sellers will likely get full-price offers and sometimes even more. If demand is weak, then offers below the asking price may be in order.
How do you make an offer?
The process of making offers varies around the country. In a typical situation, you will complete an offer that the REALTOR® will present to the owner and the owner's representative. The owner, in turn, may accept the offer, reject it or make a counter-offer.
Because counter-offers are common (any change in an offer can be considered a "counter-offer"), it's important for buyers to remain in close contact with REALTORS® during the negotiation process so that any proposed changes can be quickly reviewed.
Inspections?
A number of inspections are common in residential realty transactions. They include checking for termites, surveys to determine boundaries, appraisals to determine value for lenders, title reviews and structural inspections.
Structural inspections are particularly important. During these examinations, an inspector comes to the property to determine if there are material physical defects and whether expensive repairs and replacements are likely to be required in the next few years. Such inspections for a single-family home often require two or three hours, and buyers should attend. This is an opportunity to examine the property's mechanics and structure, ask questions and learn far more about the property than is possible with an informal walk-through.
Get Insurance/what kind and how much?
There are various forms of insurance associated with home ownership, including these major types:
Title insurance: Purchased with a one-time fee at closing, title insurance protects owners in the event that title to the property is found to be invalid. Coverage includes "lenders" policies, which protect buyers up to the mortgage value of the property, and "owners" coverage, which protects owners up to the purchase price. In other words, "owners" coverage protects both the mortgage amount and the value of the down payment.
Homeowners' insurance: Homeowner's insurance provides fire, theft and liability coverage. Homeowners' policies are required by lenders and often cover a surprising number of items, including in some cases such property as wedding rings, furniture and home office equipment.
Flood insurance: Generally required in high-risk flood-prone areas, this insurance is issued by the federal government and provides as much as $250,000 in coverage for a single-family home plus $100,000 for contents.
After The Closing!
Those papers you received at settlement are extremely valuable, so hold on to them! In the short-term they can help establish tax deductions for the year in which the property was purchased. In the future, such papers will be important for tax purposes when the property is sold, and in some cases, for calculating estate taxes.
Also at closing, determine the status of the utilities required by the home, items such as water, sewage, gas, electric and oil service. You want utility bills to be paid in full by owners as of closing and you also want services transferred to your name for billing. Usually such transfers can be done without turning off utilities.
Moving in
It is generally understood that sellers will leave homes "broom clean" when moving out. This expression does not mean "vacuumed" or "spotless." Broom clean makes sense because it means the house is ready to be painted and cleaned.
Your home, your money
For most owners a home is the largest single asset they hold, so it makes sense to protect that asset.
Many owners make a photo or video record of the home and their possessions for insurance purposes and then keep the records in a safety deposit box. Your insurance provider can recommend what to photograph and how to secure it.
You want to maintain fire, theft and liability insurance. As the value of your property increases such coverage should also rise. Again, speak with your insurance professional for details.
Lastly, enjoy your home. Owning real estate involves contracts, loans, and taxes, but ultimately what's most important is that home ownership should be a wonderful experience. Enjoy
|
