Objective 2. 03 Analyze financial and legal aspects of home ownership
So you want to buy a house… • Most people need to borrow money called a mortgage • Mortgages are contracts outlining terms of a loan between lenders and borrowers • Loans are repaid monthly over a term of 15 -30 years.
Fixed Rate Mortgages (interest rate and monthly payment are constant) 1. Conventional 2. FHA-insured: (Federal Housing Administration) guarantees mortgages made to those with lowmedium credit 3. VA loan: loan guaranteed by the Veterans Administration.
Estimating What You Can Afford • Multiply two-and-one-half times your annual gross income (income before deductions) – Gross income X 2. 5 = price of house you can afford • Buyers must also have a down payment of at least 5%. This is a part of the purchase price that must be paid in cash!
Down Payment Calculation • Example: $72, 000 with 10% down payment – Cost of house = $72, 000. 00 – 10% down payment = $7200 – Amount to finance = $64, 800 • Example: $72, 000 with 20% down payment – Cost of house = $72, 000. 00 – 20% down payment = $14, 400. 00 – Amount to finance = $57, 600. 00 • Larger the down payment, the smaller the mortgage!
Qualifying for a Loan 1. Housing to Income Ratio: ALL of your housing Ratio costs should equal no more than 28% of your gross monthly income – Includes mortgage payment, property taxes, insurance, utilities, repairs, maintenance 2. Debt to Income Ratio: Monthly housing costs plus other long-term debts should total no more than 36% of your gross monthly income – Long-term debts are those that take longer than 10 months to repay 3. BOTH ratios must be met to qualify for a loan!
Stop here and complete “Calculating Housing Costs”
The Purchasing Process 1. Agreement of sale or purchase agreement: – States all the conditions of the sale 2. Earnest Money: – Money potential buyer pays to show they are serious – Money is held and applied to the cost of the house or refunded if the buyer cannot get a loan.
3. Abstract of title or title search: – Makes sure the seller is the true owner of the house – Makes sure there are no debts on the house 4. Survey: – Makes sure property lines are accurate.
5. Inspections: –General home inspection (roof, heating and cooling systems, structural problems, safety issues) –Termite inspection 6. Secure a mortgage – Today most buyers become pre-approved.
7. Closing: – Buyer takes ownership of property – Involves seller, buyer, lawyers, and real estate agents – Closing costs are paid – – – Origination fees: paid to lender for fees processing loan Appraisal fee: paid for determining the value of the property Other fees for lawyers, real estate agents, etc. Some of the money will be held in escrow for property taxes and insurance.
Advantages of Owning a Home • Sense of freedom and independence • Financial advantages: – Helps establish a good credit record – Interest and property taxes are deductible – Houses usually increase in value – this is called equity.
Equity Example – Mary owns a house. She currently owes $90, 000 on her mortgage. She has decided to sell her house and buy a new one – Mary’s real estate agent sells Mary’s house for $140, 000 (market value) – Mary paid off her mortgage of $90, 000 – How much money did Mary make when she sold her house? – Mary made $50, 000. This is called equity. – Mary used her equity as a down payment on a new home.
Disadvantages of Owning a Home • Strain on finances- property taxes, insurance, and maintenance • Uses up lots of your free time • Foreclosure if you get behind on monthly payments • Limited mobility.
Property Virgins: “Danish Modern”
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