Begin your decision-making process by analyzing
the financial aspects of home ownership.
Understand that there are many good reasons
to buy which can't be measured with a calculator--your
long-term security and leaving something
to your children, for example. May it suffice
that we briefly direct your attention to
such matters and move on.
Assuming you plan to own your home for several
years and can afford the payments, you'll
likely be better off owning versus renting.
Here are some points to consider:
|| You might receive a state
income tax renter's credit, but nothing more.
||Payments towards interest, taxes and points are tax deductible.
||None, unless your rent payment is lower than the cost of owning a home,
and you invest the difference in a CD, stock or mutual funds.
|| Even if your
home value remains constant, your loan balance should decrease. This results in increasing equity your property.
||Most leases are less than 1 year in duration. It's easy to move at the end of a
lease. Also, your landlord usually won't have to renew your lease, and you could be forced
to move out at the end of your lease.
||Selling a house can take time and
may cost 6% to 8% of the sales price. If you have to sell
quickly, it could cost even more. If you don't have to sell,
yet must move, consider renting your house.
You'll probably receive additional benefits by depreciating your home for income tax purposes. Remember, buying a home makes
sense if you plan to hold it for several years.
|| Your rent payments generally increase every year. Rent increases
are often tied to inflation.
||Mortgage payments on a fixed-rate loan will not change. Adjustable-rate loan payments vary according to
the terms of the note and economic conditions.
||Renting makes sense if your time frame is less than 2 to 3 years.
||The longer you plan to own your home, the more sense it makes to
buy. Some buyers with plans to move relatively soon may buy if they expect the market to
Additional points to consider in
your decision include:
- What are my reasons of owning a home?
you need a bigger home? Do you need a better neighborhood? Are
you speculating that prices will increase? Whatever
your reasons, it helps to write them down. Seeing your reasons
on paper helps create objectivity, and will help you follow
through in the event you get the "jitters" later on.
- Do I have enough cash for the down payment?
While this is certainly an important consideration, many lenders today offer zero-down and low down payment loans. However, you may still have to come up with
cash for closing costs and moving expenses.
- Can I afford to
make house payments in addition to making payments on my other debts?
is probably the single, most
important question to answer accurately. Spend adequate time
creating a realistic budget. If you fall too far behind in your mortgage payments or
property taxes, you'll probably lose your home and any equity you
might have had in it. Generally, you
should spend less than a third of your gross income on your total housing expense, including
principal, interest, taxes and insurance.
How Much Money Should I Put Down?
A important step in purchasing
is home is determining how much of a down
payment you'll make, and from what sources
the down payment and other costs will come. For
accurate answers to these questions, a current inventory
of your assets is crucial.
Begin by gathering all financial statements
for all your assets. You may not plan
to liquidate all assets, but a complete
accounting is important. The assets you
keep can serve as collateral for a
loan and as reserves which may be required
by your lender. If you're going to receive
a gift from a relative, try to obtain a
letter stating the amount of the gift.
You may be able to borrower from your
401(k) without any tax penalties. If
you liquidate your 401(k) or IRA, there
may be tax implications. Consult
with your tax advisor before liquidating
If you own stock you want to keep,
consider borrowing against it with a margin
loan. Consult with your stock broker regarding
This worksheet may help you inventory your
|Retirement Funds (401K,
|Gifts from relatives:
|Total Cash Available:
Determine the total cash needed to close:
|Closing costs including
(taxes, prepaid interest, insurance,
|Cost of repairs, if
|Total Cash Needed:
Calculating the total cash needed can
be challenging, especially if you're doing
this for the first time. Consider getting
help from a real estate or mortgage
professional. They're usually quite generous
with assistance and advice in anticipation
of helping you with your transaction. Ask
your mortgage company to provide a
Good Faith Estimate of closing costs--including
If you're short on cash, consider asking
the seller to pay your closing costs. Discuss
this with your Realtor prior to making your
Ideally, you'll want make a 20
percent cash down payment to avoid
Private Mortgage Insurance (PMI) and get
the best rate. If you are unable to
put 20 percent down, there are many
programs available. Here are some of them:
How Much Home Can I Buy?
- Zero Down Programs There are
many zero down payment programs available.
If you qualify for a VA loan, you can
get a zero down program. Even if you're
not a vet, several lenders offer
zero down loan programs. Your mortgage
broker can help you find the best one
- Low Down Payment Programs There
are numerous FHA and conventional programs
that allow you to put as little as 2
to 5 percent down.
- Piggy Back Loans By getting a
piggy back loan, you can generally avoid
paying PMI, even though you are putting
less than 20 percent down. The most
common piggy back loans are:
- In the case of an 80-10-10, you
put down 10 percent and get two
loans--a first loan for 80 percent
of the purchase price, and a second
loan for 10 percent of the purchase
price. Even though the second loan
rate may be higher than the first
loan rate, you generally come out
ahead since you don't have to pay
- Eighty percent first loan, 15 percent
second loan, 5 percent down.
- Eighty percent first loan, 20 percent
second loan, no cash down.
Like most industries, the mortgage industry
uses its own jargon. Understanding the terminology
of the industry will serve you well in understanding
the process of buying and financing your
home. Here is some terminology you will
need to understand:
Here is an example of how the above information
- Application: The loan application
is a comprehensive document representing
the borrowers income, expenses, assets,
liabilities and net worth. It can be considered
both an Income Statement and Balance Sheet
of the borrower. The application helps
the lender determine the borrower's credit-worthiness.
- PITI: An acronym for Principal,
and Insurance. Principal
and interest refer to your monthly mortgage
payment. Taxes and insurance refer to 1/12
of the annual property taxes and insurance
premium. PITI is designed to represent
the monthly cost of home ownership (total
housing expense ) for qualification
purposes. (Total housing expense can include PMI
and association dues if applicable.)
- Gross Monthly Income: Gross monthly
income is your monthly income before income
taxes. You are usually given full
credit for your base salary. Overtime,
commissions and bonuses are usually averaged
over the previous 24 months. If you
are self-employed, the income reported
on your tax return will usually be
averaged over the previous 2 years.
- Front-Debt Ratio (top ratio):
Your front debt ratio is your PITI
divided by your Gross Monthly
Income. This qualifying
ratio is used by the lender
in making a decision to grant or deny your
- Back-Debt Ratio (back-end, bottom,
total expense, total debt ratio, ):
Your back-debt ratio is PITI +
Other Monthly Debt Expenses divided
by your Gross Monthly Income.
Other monthly debts include auto loans,
credit cards, person loans, student loans,
etc. Your phone and electric bills are
NOT considered part of your debt expenses.
This qualifying ratio
is used by the lender in making a decision
to grant or deny your loan request.
- Loan to Value (LTV): LTV = loan
amount divided by the property value.
With this information, qualifying ratios
and the LTV can be calculated:
- Monthly base income: $5,000
- PITI: $1,000
- Other monthly debt (credit cards and
student loans): $600
- Home purchase price: $100,000
- Down payment: $20,000
Mortgage companies and lenders like to see qualifying
ratios at or below acceptable levels set by
the industry. Acceptable qualifying ratios
denote a borrower's ability to repay
the debt. A low LTV is also desirable. The
lower the LTV, the greater the equity
the borrower has in the home, and the more
secure the lender's investment. As the LTV
increases, acceptable qualifying ratios
- Front-debt ratio: $1,000 / $5,000 = .20
- Back-debt ratio: $1,600 / $5,000 = .32
- LTV: $80,000 / $100,000 = .80
Here is a table of LTV and maximum qualifying
ratios used in the industry. These ratios
are general guidelines only. In practice, lenders
make their own decisions based on a number
of additional factors such as your credit
history, length of employment, etc. Please
check with your mortgage company regarding
your particular situation.
|| Front-Debt Ratio
|| Back-Debt Ratio
|At or Below 90%
Tips and Tricks: You may be able
to increase your purchasing power by:
- Paying off debt:This would reduce
your back-debt ratio. Many lenders do
not count the monthly payment on your
installment loans if you have fewer than
10 payments left. If you have a car payment
with 12 payments left, you may want to
consider making additional payments to
reduce your total payments left to under
- Making a larger down payment:
This reduces your LTV, total housing expense
and provides for higher qualifying ratios. If
you make a down payment of 20% or
more, you won't have to pay PMI.
- Borrowing against your 401(k):
You can sometimes increase your purchasing
power by using the proceeds of your
401(k) loan to pay down your other debt,
or to use it towards the down payment.
This can be a little tricky, so please
consult with a mortgage professional.
- Obtaining a margin loan: If you
own stocks and do not want to sell them,
your stockbroker may be able to arrange a
margin loan, using your stock as collateral.
Since a margin loan has no monthly payments,
this generally does not affect your debt
ratios. You may use the proceeds towards
the down payment or to pay off debt.
Should you be pre-approved or pre-qualified?
As a potential buyer
competing for a property, you'll have a better chance of
getting your offer accepted by being as prepared as possible.
Consider this hierarchy
The benefits available at each level can be
easily understood when viewed from the seller's perspective.
Imagine you're a seller in receipt of multiple offers to
purchase your property. A complete stranger (buyer) is
asking you to take your property off the market for at least the
next two to three weeks while they apply for a loan. As the
seller, let's consider the type of buyer you'd prefer to deal with.
- 1. Neither pre-qualified nor pre-approved
- 2. Pre-qualified
- 3. Pre-approved
- 1. Neither pre-qualified nor pre-approved
This buyer provides no evidence
that they can afford to purchase your property. You may wonder how serious they are since they're not at least pre-qualified.
- 2. Pre-qualified
- This buyer met with a mortgage broker
(or lender) and discussed their situation. The buyer informed the broker regarding their income, expenses, assets and liabilities. The broker may also have seen their credit report. The buyer provided you with a letter from the broker stating an opinion of what the buyer can afford.
- 3. Pre-approved
- This buyer provided a broker or lender written
evidence of income, expenses, assets, liabilities and credit.
All information was verified by a lender. As a result,
much of the paperwork for this buyer's loan has been completed.
This buyer will probably be able to close quickly. They provided you
with a letter (pre-approval certificate) from the
lender. You're as certain as possible that this buyer can close.
As a potential buyer, you can see that being pre-approved
will give you the best chance of getting your offer accepted. This is
critical in a competitive situation.
Start looking for a Home
You're prepared and ready to purchase a
home. Now it's time to go out into the market
place and find it. Will you use a real estate
agent to help you look, or will you look
on your own?
For practically everyone, it's worthwhile
to use a real estate agent. The benefits
of using an agent are numerous.
Advantages of using a real estate agent
A good agent builds a career by creating
repeat customers and earning referrals.
To that end, she does everything possible
to make your home-buying experience as pleasant
as possible. An agent is expert in her market.
She knows (or can find) everything you want
and need to know about the community.
An agent will:
- Arrange access to homes for you to preview
- Accompany you on your tour of homes
- Research the neighborhood, including
- Draft the offer to purchase
- Negotiate with the seller
- Arrange inspections
- Abide by all local, state and federal
- Help you obtain financing
- Review all closing documents for correctness
- Follow up after closing to make sure
you're move-in is accomplished smoothly
Finding and keeping a good agent
Finding a real estate agent is easy. Finding
one you'll enjoy working with may require
some effort. When you find one, stick with
her. Give her the same respect and consideration
you'd expect. When she knows she has your
loyalty, she'll be more likely to do the
best job for you.
Two on-line resources which may help you
find a real estate agent are Realtor.com
Disadvantages of using a real estate
One potential disadvantage of using an agent
is that the seller may be less flexible
with the price since they'll be paying a
real estate commission. In the customary
transaction, the seller pays the agent for
Understanding Market Conditions
The price you pay for your home will be
affected by prevailing economic (market)
conditions. Changes in market conditions
can have an immediate and significant effect
on property values. For this reason, it's
important to be aware of current conditions.
The price of real estate is affected by
the supply and demand for credit and real
property. The supply of capital is finite.
Capital available for lending is shared
among government, business, consumer, mortgage
and other borrowers. If capital is in relatively
short supply, the cost of capital rises.
When capital is in relatively great supply,
the cost of capital declines.
The supply of money and credit in the economy
is regulated by the Federal Reserve Bank.
If The Fed makes too little credit available,
demand for money can cause interest rates
to increase. Borrowing, investing and sales
decrease as interest rates rise, which can
lead to an economic decline. Alternatively,
if there is too much available credit, interest
rates can fall. When interest rates are
low, price levels for goods and services
can increase as people are willing to pay
more and more for them, which can potentially
lead to inflation. It's The Fed's job to
use monetary policy to achieve a growing
yet stable economy.
The price you pay for your home can be
affected by interest rate levels. Interest
rates can change relatively quickly. Conversely,
the supply of housing changes slowly. In
the short run, the housing supply can be
Consider what can happen in the housing
market when interest rates are relatively
low. Low interest rates allow a larger number
of home buyers (borrowers) to enter the
housing market. More buyers competing for
a fixed supply of housing can cause the
price of housing to increase. This type
of market is sometimes referred to as a
seller's market . In a seller's market,
properties sell quickly, multiple offers
are common and property values may be increasing.
When interest rates rise, many would-be
buyers no longer qualify for mortgages and
leave the housing market. This type of market
is referred to as a buyer's market. In a
buyer's market, property values may be level
or decreasing as sellers compete to attract
As a home buyer, your buying behavior can
be influenced by market conditions. If you're
in a seller's market, you may feel pressure
to act quickly and offer top-dollar for
a property. In a buyer's market, you may
feel less hurried, more in control of the
situation and inclined to offer relatively
less for a home.
Make An Offer
You've finally found the property
you want to buy and it's time to make an
offer. Be careful not to act hastily. Draft
your offer carefully and exercise good judgment. Here
are some import steps to follow:
Rules to Negotiate By
- Act now. Assume there
is no time to waste in making your offer. You've
invested time and energy in your search
for a home--now follow through. If possible,
let the sellers know they'll be receiving
your offer shortly.
- Determine your offering price.
You'll want to be aware of dynamic market
conditions, as well as property-specific
factors contained in a comparative
market analysis (CMA).
The CMA is a is a tool for comparing the
subject property with other similar properties
in the neighborhood. A well-prepared CMA is
critical in helping to determine the fair
market value of the home (which may be
what you offer). Your real estate agent
should have a form specifically designed
for this purpose. The CMA will also
include Listing Date, Listing Price, Listing
Expiration Date, Sale Price, and
Sale Date, number of Days on the Market.
The CMA should include homes currently
for sale, home sold and homes which were
listed but didn't sell.
- Protect yourself.
Your offer should contain financing and
inspection contingencies for your protection.
If you're working with a licensed real
estate agent, it's likely she'll
be using a comprehensive form which includes
standard text for virtually all normal
- Think ahead. Now is
the time to plan when you want to close
the transaction. If you're nearing the
end of your tax year, discuss with your
tax advisor the best time to close. There
may be benefits associated with closing
in the next tax year. Consider closing
near the end of the month. Pre-paid interest
on your new loan will usually be
less. Coordinate closing with the closing
of your current home, or the termination
of your lease.
- Present your offer.
If you're working with an agent, she'll
likely present your offer for you.
Letting her represent you will help protect
against emotional flair-ups which can
occur in face-to-face negotiations between
- Negotiate. Unless
you're offering the seller exactly what
they're asking, prepare to negotiate.
A good real estate agent will be schooled
in the art of negotiation and will employ
important negotiation techniques while
representing you. Additionally, you can
benefit by reading up on the subject.
Local and on-line booksellers will have
many books on the subject from which to
Many books exist on the art of negotiation.
If you haven't read a book about real estate
negotiation, you can still come out
a winner by remembering two important
rules. These rules will help save you more
money than virtually all other negotiating
- 1. Deal with a motivated
- The more someone wants something, the
more they'll sacrifice to get it. In the
case of buying real estate, find a
seller who wants your money more than
you want their house. A motivated seller
is much more likely to make concessions
in your favor. You may have to make offers
on several properties before you find
a motivated seller. When you find one--you'll
- 2. Know when to
walk away. If you reach that point--walk.
- How do you determine ahead of time
when to walk away? Before making your
offer, you completed (or had your agent
complete) a Competitive Market Analysis
(CMA). The CMA helps you determine the
value of the home. Can you offer more
than the CMA suggests? Sure. And in a
hot market, you may have to. But
decide ahead of time how high you'll go, and
what concessions you're prepared to make.
Price isn't the only reason you might
walk away. Don't compromise on home inspections,
removing contingencies too soon, allowing
enough time to act, etc.
Inspections and Disclosures
- By all means, negotiate.
- Negotiation is part of the process
of buying a home. Price is just one point
of negotiation. Personal property, home
inspections and repairs, closing dates,
etc., may also come into play. If you're
like most people, your home is the largest
purchase you'll ever make. It's likely the
home-buying experience will be an emotional
one. If you find yourself reaching the
limits of your patience and endurance,
don't despair -- that too is sometimes
part of the process. By remembering the
two rules, you'll do fine.
- Maintain your objectivity.
- This isn't always easy. At least two
compelling influences will test your ability
to remain objective: a hot market and
finding the "perfect" home. A hot market can
sway you to offer more than the home is
perhaps worth. Finding the perfect home
can also have such an effect. It is true
that no two homes are exactly alike. For
practical purposes, most homes are very
much alike, however. When you think you've
found the perfect home, chances are there's
another one available just like it and
for possibly a better price.
- You can always increase your
- But you can seldom decrease it. Unless
you have the misfortune of buying in a
hot market, start by offering lower than
asking price. Just how low you make your
first offer depends on several factors.
How well is the home priced? If it's priced
well and you don't want to risk insulting
the seller, offer close to what the CMA
suggests. If it's a hot market, you may
have to offer full price or more. If it's
a slow market and you think you have a
motivated seller, you may be successful
offering a relatively low price.
- Get it in writing.
- Your state may require that contracts
for the sale of real property be in writing.
Do not expect oral agreements to be enforceable.
- Give up something to get something.
- Ask for something you can easily give
up. If the seller sees you're making concessions,
they'll be more likely to give you what
you really want. In your offer, include
some things you can do without. Here's
a hypothetical example:
A home is for sale for $110,000. What
you want most is to buy it for
$105,000. You offer $100,000, 45-day
escrow, you get the refrigerator and
a $1000 credit to clean the home.
During negotiations, you give up the $1,000
credit, the refrigerator and agree to
a 30-day escrow. The sellers feel like
they won something, and you get the home
for $5,000 less than you were willing
- The Impasse
- There may be an item which bogs
down negotiations. When this happens,
quickly move off the item and onto
something you can agree upon--no matter
how small. This approach is also used
to delay negotiations over an item you're
sure will be a challenge to overcome.
By reaching agreement on several
smaller points, an environment of successful
cooperation is created which helps to
resolve larger issues.
Generally, the seller should inform you of
any adverse property conditions of which he
or she is aware. This is of no help if there
are adverse conditions of which the seller
is not aware. The federal Real Estate
Disclosure and Notification Rule requires
that you be informed of certain adverse environmental
conditions affecting the property. Unfortunately,
there are circumstances in which you aren't
required to receive the disclosure. As a consumer,
it is up to you to protect yourself, your
family and you investment. While visiting
properties, make notes of items possibly
requiring investigation in the event you
make an offer. Here are some areas of potential
investigation to be considered when visiting
and buying a home.
- Age and condition of structural
- Be aware of the condition of plumbing,
electrical, heating, or other mechanical
- Required permits
- Have structural additions, alterations,
replacements, or repairs been made? If
so, were proper permits obtained?
- Are there flood, drainage, settling
or soil problems on or near the property?
- Common areas
- Are there homeowners' association obligations,
deed restrictions or common area problems?
- Are there noise or nuisance problems?
- Environmental conditions
- Is there lead-based paint, asbestos,
radon gas, fuel, chemical storage tanks,
contaminated soil or water affecting the
home? You may want to contact the United
States Environmental Protection Agency
for more information.
Final Loan Approval
Perhaps you were pre-approved prior to
or during your home-hunting activities.
Pre-approval can take place in the absence
of having identified a home to purchase.
A. All Borrowers:
When you enter into a contract to purchase
your home, you begin the process of obtaining
final loan approval. To convert your pre-approval
to final loan approval, the main items the
lender needs include the appraisal, purchase
contract and title information. Your real
estate agent, loan agent and attorney (where
applicable) will be instrumental in providing
these documents to the lender.
If you were pre-approved, you probably gave
many of these documents (below) to your
lender. Review the list to make sure the
lender has current documents. If you're
just beginning the approval process and
the lender will be verifying your income,
assets and liabilities, you'll need to gather
B. Employed Borrowers:
- Copy of purchase contract
- Copy of sales contract on real estate
you are selling
- Divorce or separation documents
- Bankruptcy files
- Relocation agreement
- Copy of most recent Social Security
- Award letter and copy of most recent
checks for disability, retirement, or
- Recent statements for all credit card
- Bank and financial brokerage account
statements for the previous three months
- IRA, Keogh and 401(k) statements for
the previous three months
- Title documents for automobiles under
five years old
C. Self-Employed Borrowers:
- (Documents in section A.)
- Pay stubs for the previous 30 days
- W-2s for the previous two years
- 1099s for the previous two years
- (Documents in section A.)
- Federal tax returns for the previous
- Year-To-Date Profit-and-Loss statement
for your business
Lock Your Rate
Locking your loan must be done prior to
closing. If rates are rising, you
may benefit by locking your loan early in
the loan application process. If rates are
stable or falling, you may benefit by waiting
until the last possible moment to lock your
loan. The shorter the time period between
the lock and closing dates, the lower the
loan fees and interest rate.
A lock-in, or rate commitment, is a lender's
promise to close your loan at a certain
interest rate and number of points. Depending
upon the lender, you may be able to lock upon
submitting your application, during application
processing, upon loan approval, or later.
A lock protects you against rate increases
while your application is being processed.
However, a locked-in rate could cost you
money if rates drop and you want a lower
You will need to lock the rate prior
to closing. There are five components to
a rate lock:
The document describing the lock will contain
the date the lock was made and usually the
lock expiration date. The lender must disburse
funds prior to expiration, otherwise,
the rate lock is invalid.
- Loan program
- Loan amount
- Interest rate
- Length of the lock
A loan with a below-market interest rate is
less attractive to a potential purchaser of
the loan. The longer the lock period, the
greater the risk that interest rates will
increase before the loan closes. To offset
this increased risk, the lender charges increasingly
higher points and interest for longer lock
If you're close to the contractual closing
date for your new home, you may not have the
option to choose when to lock your loan. You
may have to lock it as soon as the lender
Congrats You Are A Homeowner !!