PF Chapter 9
Homeownership vs. Renting?
Homeownership: - Permanent - Investment from appreciation and equity build-up - Tax benefits (Deduct some closing costs, ignore up to $500,000 in CG if married jointly and live in a house 2 of past 5 years - $250,000 for others) - More freedom of control - Hedge against inflation - Pride of ownership Renting: - Ease of mobility - Too expensive to buy - No money for down payment - No property taxes - No major residence - Can't qualify for a loan (Bad credit - < 720 FICO, Low income - 28%/36% ratios, New job - < 2 years, Cash shortage - down+closings)
Comparison of 30 and 15 Year FRMs
(Slide 9-33)
Comparison of Different Rates
(Slide 9-34)
Points are prepaid interest as a % of the loan amount
- 1 point = 1% of loan amount
What can a real estate agent do?
- Assess your housing needs and determine what you can afford - Present your offer, negotiate the price, and assist you in obtaining financing, and represent you at the closing
Loan Approval Process
- Borrower must satisfy both front-end and backend ratios to be pre-qualified • Front-End: PITI < 28% of Gross Income • Back-End: PITI + Min. Debt Pmts < 36% of Gross Income - Once application information is verified, borrower is pre-approved
What are the legal details of a license?
- Description and address of property - Name and address of the owner/landlord (lessor) - Name of tenant (lessee) - Effective date and length of lease - Amount of security deposit - Amount and due date of rent - Location where rent is due - Date and amount for late rent payments - List of included utilities, appliances - Restrictions on certain activities - The right to sublet the unit - Conditions where landlord may enter rental unit
Pricing the Property?
- Determine the home price (which is affected by whether it is a seller's market - high demand - or a buyer's market - low demand - and consider recent sales, current demand, DOM, owner's need to sell, financing options and home amenities) - Negotiating the purchase price (counter-offers are common, have earnest money - a buyer deposit to show good faith, have contingency clauses, like the buyer needing to obtain financing, and to purchase a contingent on sale of the buyer's current home)
Building a home
- Does the contractor have the needed experience? - Does the contractor have a good working relationship with the architect, suppliers, electricians, plumbers, carpenters and others? - What assurance do you have about quality? - What are the payment arrangements? Draws against construction loan? - What delays will be considered legitimate? - Is the contractor licensed and insured? - Are there any complaints about the contractor? - Contract should have a time schedule, cost estimates, description of work, and a payment schedule
Adjustable rate mortgages (ARM)
- During the life of the loan the interest rate varies with an index - Likely has two rate caps to restrict rate changes • Periodic cap • Life-of-the-loan cap - Convertible ARMs allow owner to convert to FRM
Balloon
- Fixed payments plus one large payment prior to maturity - Passes interest rate risk to borrower, so get lower interest rate
How to qualify for a mortgage?
- Includes your income, debts, credit history, down payment amount, length of the loan, and current mortgage rates - Application process: • Step 1: Prequalification • Step 2: Finding a property, including appraisal • Step 3: Fee Payment (in some states) and interest rate lock commitment
Mortgage company will want an appraisal
- Independent estimate of value, given current market conditions
What are the opportunity costs of housing choices?
- Interest earnings lost on money used for a home down payment or a rental security deposit - Time and cost of commuting to live in an area that offers less costly housing or more space - Renters lose tax advantages and equity growth - Time and money you spend to repair and improve a lower-quality home - Time and effort when you have a house built to your personal specifications
Types of Housing Available Pt. 2
- Manufactured Homes (Fully or partially assembled in a factory, then moved to the housing site - prefabricated type has components built in the factory and is built at the site, and mass production under factory conditions keeps costs lower than site built homes) - Mobile Homes (A type of manufactured home, often less than 1000 sq. ft, which offers the same features as a conventional house, where safety is debated and home value tends to depreciate, and it is also very energy inefficient)
What are the disadvantages of renting?
- No tax benefits - Limitations regarding remodeling - Restrictions regarding pets and other activities - Legal concerns of a lease - Costs include a security deposit, utilities, and renter's insurance
Types of Housing Available Pt. 1
- Single-family dwelling - Multi-unit dwelling (Duplex, townhomes) - Condominium (You own your own unit in a building of units - not a type of building structure, rather a form of homeownership, where you own the air space between walls, floor and ceiling as fee simple estate, and you own common areas as Tenants in Common)
Closing costs include...?
- Title insurance and search fee - Attorney's and appraisers fees - Property survey; Pest inspection - Deed recording fees; Transfer taxes - Credit report; Lender's origination fee - Escrow account for tax and insurance reserve - Pre-paid interest; Real estate commission
Government Financing Programs
- Veterans Administration (VA) - Federal Housing Administration (FHA) - Often lower down payment than conventional
Home Buying Process - Determining Homeownership Needs
Advantages of homeownership: - Permanent - Investment from appreciation and equity build-up - Tax benefits (Deduct some closing costs, ignore up to $500,000 in CG if married jointly and live in a house 2 of past 5 years - $250,000 for others) - More freedom of control - Hedge against inflation - Pride of ownership Drawbacks of homeownership: - Financial uncertainty (obtaining money for down payment, obtaining mortgage financing, home values could drop) - Limited mobility (can take time to sell your home) - Higher living costs (home improvements, rising real estate taxes)
Conduct a home inspection or hire an inspector?
Check Exhibit 9-6 on pg 296, but it involves looking at the interior and exterior of the property. It looks at both the interior construction (condition of electrical fixtures and wiring, condition of plumbing fictions, ease of operation of windows, etc.), the interior design, exterior construction, and exterior facilities.
Renting Your Residence - searching for a home?
Searching for a house: - Select an area and rental cost for your needs (School, church, shopping, transportation, and recreation) - Compare costs and facilities between units (Lease terms, utilities, exterior condition, interior condition - size, rooms, HVAC, storage, security) - Talk to current and past residents
Finding and Evaluating a property to purchase!
Selecting a location: - Be aware of zoning laws (public restrictions on how property can be used, and private restrictions are called "deed restrictions") - Assess the school system if you have children - Sex predator search: https://records.txdps.state.tx.us/DPS_WEB/SorNe w/index.aspx
What do traditional financial guidelines suggest?
That you spend no more than 25-33% of take-home pay on housing, or no more than 2 and a 1/2 times your annual income
Housing Alternatives
Your housing choice is affected by how you spend your time and money - your lifestyle, though personal preferences are modified by financial factors
Documents signed
meeting of buyer, seller, and lender
OTHER FINANCING METHODS
• Buy-Downs - Interest subsidy from a home builder or a real estate developer that reduces the debt service for the first few years • Second mortgage - Home is collateral and equity is borrowed - Interest may be tax deductible (e.g., home equity loan) • Reverse mortgages - Provides elderly (> 62 years old) with tax-free income based on the home equity - Loan repaid when owner dies or sells • Refinancing - Obtain new loan to pay off old loan - Reasons to refinance: • Take advantage of lower interest rate • Change term of mortgage • Change type of mortgage • Withdraw equity • Eliminate PMI
FIXED-RATE, FIXED-PAYMENT MORTGAGES
• Conventional - Fixed rate, fixed payment, amortized - 5%, 10% or 20% down - 15, 20 or 30 years of fixed payments - See www.bankrate.com for amortization schedule
Obtaining Financing?
• Determine the amount of the down payment - PMI required on conventional loan if < 20% down - PMI typically costs 0.50% at closing + 1/12 of 0.50% per month until loan is < 78% of original purchase price • Investigate the rates, types, & terms of mortgages • Apply for a mortgage and evaluate types of mortgages. Guidelines for affordability of housing costs are 33% to 38% of gross income
FNMA Conforming Conventional Qualifying Guidelines
• If borrower satisfies FNMA's guidelines, FMNA will purchase loan from originator • Conforming loan maximum = $417,000 • FNMA interested in value of collateral and quality of borrower's income, assets, debts, credit history, etc 25
Escrow Account
• Mortgage company will usually establish an escrow account • A cash savings account used to pay insurance premiums and property taxes • Must maintain a certain balance • Interest earned is kept by the mortgage company • Can get around setting up escrow account, but may have to pay a waiver fee
Selling your home
• Preparing your home - Repair, repaint, and clean - Declutter house - When showing home, turn on lights and open drapes. Bake bread or make coffee for a welcoming smell • Determining the selling price - Appraiser estimates the current value - Real estate agent markets your home • FSBO vs. Listing - If "for sale by owner," use a lawyer or Title Company - List with a real estate agent for services • Deed vs. Title - Deed transfers ownership - Title is evidence of ownership
FMNA-Conforming, Conventional Qualifying Loan Example
• Step 1: The Facts - Gross Annual Income = $60,000 - Debts = $5,400 per year - Sale Price = $120,000 - Loan = 90% LTV ratio at 10% for 30 years - Escrows annually = $1,200 taxes; $600 insurance; $300 PMI (i.e., $2,100 total) • Step 2: Calculate Debt Service - MC = .10 / {1 - [1 / (1.10)30]} = .10 / 0.942691 = 0.106079 - DS = Loan x MC = $108,000 x 0.106079 = $11,457 • Step 3: Calculate PITI - PITI = DS + Escrows = $11,457 + $2,100 = $13,557 • Step 4: Calculate PITI + Minimum Debt Payments - PITI + Debts = $13,557 + $5,400 = $18,957 • Step 5: Calculate Front-End Ratio - FER = PITI / GI = $13,557 / $60,000 = 22.6% • Step 6: Calculate Back-End Ratio - BER = (PITI + Debts) / GI = $18,957 / $60,000 = 31.6% • Step 7: Pre-qualification test - Meet FER? YES, because < 28% - Meet BER? YES, because < 36%
