Home Buying 101: Ignorance Can Cost You


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Home Buying 101: Ignorance Can Cost You

  1. 1. Home Buying 101: Ignorance can cost you! Presenters: The O&A Home Team, BHHS Fox & Roach, Realtors™ Rich Hoskins, Trident Mortgage Home Buying Seminar - The O & A Home Team 1
  2. 2. Home Buying 101: Knowledge is Money  Real Affordability  It’s not about income & debt, but about living well.  The Real Cost of Closing  It’s more than you think!  Available Grants, Incentives and Benefits  Is there a best fit for you?  Understand Agency  Demand that your interests be protected!  The Right Home for the Best Price  A home YOU feel is worth the price.  Attorney  This is not a DIY’er! Oops can be costly.  Home Inspection  Never buy without knowing you’re safe and sound. Home Buying Seminar - The O & A Home Team 2
  3. 3. Home Buying 101: Affordability  Mortgage Pre-qualification is based on:  Gross Income & Total Debt  Funds Available for Down payment & Closing Costs  Monthly Payment Affordability is based on  Your Net Income  Your Budget  Usually the amount “pre-qualified” for is greater than the “monthly payment” most want to afford. Home Buying Seminar - The O & A Home Team 3
  4. 4. Home Buying 101: Pre-Qualification • Credit Score!!! • The major factors effecting your ability to get the best interest rates Best rates to high scores • Front Ratio 28 to 31% (PITI ÷ gross income)*100 • • Back Ratio 36 to 42% ((PITI + monthly debt) ÷ gross income)*100 • • Sticker Shock • Can you handle a large monthly payment?   PITI = Principle, Interest, Taxes, Insurance Monthly debt = installment loans (car, student, personal) payments, credit card payments Home Buying Seminar - The O & A Home Team 4
  5. 5. Home Buying 101: Real Affordability  Use Mortgage “Payment” Calculator to determine true cost to YOUR budget  http://richhoskins.tridentmortgage.com/ Home Buying Seminar - The O & A Home Team 5
  6. 6. Home Buying 101: Real Affordability How much you can comfortably afford monthly. Use a calculator that determines PITI (Principle, Interest, Taxes, Insurance) components, otherwise you may not be getting the whole picture. NJ Home Purchase Input: •$300,000 with 10% down payment •$8000/year property taxes •$900/year homeowners insurance Annual PMI (Private Mortgage Insurance) applies for purchases with <20% down Home Buying Seminar - The O & A Home Team 6
  7. 7. Home Buying 101: Real Affordability Does your total monthly payment “FIT” your budget? Sometimes taxes & insurance payments can be almost as much as principle and interest payments Monthly Payment Components: •Principle & Interest $1289.02 •Property taxes $666.67 •Homeowners Insurance $75.00 •PMI $146.25 (LTV Ratio >80%) Total Monthly Payment $2176.94 Home Buying Seminar - The O & A Home Team 7
  8. 8. Home Buying 101: Down Payment  Down Payments (or equity stake)*  Minimums 3.5% FHA / 5.0% Conventional**  5 to 20% recommended  <20 % triggers Private Mortgage Insurance (PMI)   Upfront PMI premium payment (percentage of loan) Monthly PMI installment payments, or both  >20% no PMI requirements unless  Bad credit history or other indication of risk *down payment minimums are set by the financing institution or program guarantying the mortgage. **<5.0% Conventional Loans Products are no longer offered Home Buying Seminar - The O & A Home Team 8
  9. 9. Home Buying 101: Incentives  Lower Mortgage Interest Rates  Provides cheaper money for purchase (e.g. cost of loan over term period)  Increases buying power (for every 1% increase in rate, 9% decrease in buying power)  Government Programs promoting homeowner  Allow relaxed qualifications (with guarantees to lenders) in return for better interest rates  Rates usually slightly higher than conventional. Home Buying Seminar - The O & A Home Team 9
  10. 10. Home Buying 101: Benefits  Tax Benefits  Claim Itemized Deductions  Mortgage Interest Deduction  Property Tax Deduction  Consult your tax professional Home Buying Seminar - The O & A Home Team 10
  11. 11. Home Buying 101: Closing Costs  Closing costs run 4%-8%* of Purchase Price  Financing Costs  (loan- application, origination, appraisal, processing fees, etc)  Pre-paid Items  (escrow- 3 months of taxes & insurance)  Settlement Charges  (home inspection, attorney/title services, property survey, document recording, money wires…) *depends on loan terms, property type, size of escrow and prorated charges. Home Buying Seminar - The O & A Home Team 11
  12. 12. Home Buying 101: Funds at Closing  Minimum of 8% or more of Purchase Price*  Down Payment (minimum of 3.5%)  Closing Costs (minimum of 4%)  Contingency (minimum of 0.5%) *based on the example $300,000 NJ purchase, you need minimally $24,000 Home Buying Seminar - The O & A Home Team 12
  13. 13. Home Buyers 101: Cash Strapped? Options with Low Money Down      FHA Financing VA Financing USDA Financing State Financing Programs American Dream Program  County administered Down Payment Assistance  Sellers Concessions  Negotiated cash back for closing & down payment Home Buying Seminar - The O & A Home Team 13
  14. 14. Home Buyers 101: Cash Strapped? FHA Financing        Available through approved lenders US government insured loans Minimum 3.5% down payment Allows gifted money for closing Allows lower qualifying FICO 203k loans for repairs & energy efficiency http://www.hud.gov/buying/loans.cfm Home Buying Seminar - The O & A Home Team 14
  15. 15. Home Buyers 101: Cash Strapped? VA financing  0% down,  Allows gifted money for closing  For eligible US veterans only  http://www.benefits.va.gov/homeloans/elig2.asp Home Buying Seminar - The O & A Home Team 15
  16. 16. Home Buyers 101: Cash Strapped? USDA Financing  Zero % Down  Applicants for loans may have an income of up to 115% of the median income for the area  State & County Income Limits per size of household  Find eligible Communities by state and/or address + zip code  http://www.rurdev.usda.gov/RD_Loans.html Home Buying Seminar - The O & A Home Team 16
  17. 17. Home Buyers 101: Cash Strapped? State & County Programs  NJ Smart Start (many programs offered)  First Time Homebuyer: 3.o% down payment minimum  Live Where You Work: lower interest rates  Transit Smart: more relaxed back ratio requirement  American Dream Assistance $5,000 to 7,500*  Assistance amounts and income requirements vary by County  Mortgage amounts limited to 3x annual income *Mandatory Federal Budget Cuts have limited funding for this assistance Home Buying Seminar - The O & A Home Team 17
  18. 18. Home Buying 101: Agency  Agency: to act (or work) with one party on behalf of another.  Agents can work for:     Buyers (or Renters), as Buyers Agent Sellers (or Landlords), as Sellers Agent or Both, as Disclosed Dual Agent or None, as Transaction Agents Home Buying Seminar - The O & A Home Team 18
  19. 19. Home Buying 101: Agency  Consumer Information Statement  Compliance Document that an agent must present and explain to a consumer before any substantive conversation is had.  Before you discuss motivation and money with any agent KNOW who they work for Home Buying Seminar - The O & A Home Team 19
  20. 20. Home Buying 101: Agency  How are your interests will protected  As a client you are owed fiduciary responsibilities (confidentiality, care, obedience, accounting and loyalty)  As a customer, you are owed honesty (including disclosures material to the transaction) Home Buying Seminar - The O & A Home Team 20
  21. 21. Home Buying 101: Finding the Right Home  A home’s value is subjective  Location (street, development, community)  Physical (size, attributes, improvements)  Condition (fair, good, excellent)  Amenities      Workplace (proximity and opportunity) Schools (proximity and quality) Transportation (mass transit and major roads) Shops, Parks and Places of Worship Community Services Home Buying Seminar - The O & A Home Team 21
  22. 22. Home Buying 101: Finding the Right Home  A home’s worth is the balance of risk/benefit to YOU  Benefit/Gain to you  Subjective Value you assign based on the home meeting some, many or all your needs  Risk/Loss to you  How much you’re willing to give up for it  Cash/Assets/Payments  Commute/Family Time  Extra Maintenance…  How much work is involved in finishing it to your needs  Updating, upgrading, rehab? Remember there are many great houses for “somebody” there are few great houses for you! Home Buying Seminar - The O & A Home Team 22
  23. 23. Home Buying 101: Making the Offer  Purchase Price Strategy  Always get an Adjusted Comparative Market Analysis (CMA) before considering an offer   CMA = Opinion of Value based on recent sales and current market activity Adjusted values for differences between properties to proximate an apples to apples comparison  Start Offer Price below CMA value*  Try not to exceed CMA value by more than 2%  Bidding war that drives price upwards, risks the property not qualifying (appraising) for mortgage.  Should you find yourself bidding on a property where only highest and best offers are being considered, always include a Purchase Price Contingency (house must appraise for purchase price). This can release you from the contract should the home not appraise.** *on competitively priced homes, this number will be very close to asking price. **this is more important in a stable or declining market than in an improving market. Home Buying Seminar - The O & A Home Team 23
  24. 24. Home Buying 101: Making the Offer  Setting the other terms of the Offer**  Earnest Monies (Initial & Second Deposit)    This is the “skin in the game” term; the higher the better. Need not exceed down payment or 3% which ever is less. Initial Deposit with Offer is customarily $1000 (median priced home)  Financing  None or all Cash, Conventional or Guaranteed (FHA, VA, USDA)  % down payment (the higher, the better)  Closing Date and Personal Property  The more flexibility, the better to synchronize with sellers move. **These can be as equally or more important than the purchase price. Home Buying Seminar - The O & A Home Team 24
  25. 25. Home Buying 101: Negotiating the Offer  Strive for a Win – Win Situation  It’s about striking a balance between the buyer not over-paying and seller not feeling under compensated.  Usually when both sides feel a little pain, the deal is fair, the parties feel less remorse or desire to back-out at the slight hitch. Home Buying Seminar - The O & A Home Team 25
  26. 26. Home Buying 101: Offer and Acceptance  Offer or final counter-offer is accepted  Expect changes to documentation to reflect price and terms agreed upon by buyer and seller  Obtaining appropriate signatures, initials and disclosures to complete documentation  Delivery of documents (contract for purchase) signed by (executed) both parties to both parties  The contract becomes binding to both parties   Within 3 days if neither party seeks attorney review At the end of attorney review if both or either party seeks attorney review. Home Buying Seminar - The O & A Home Team 26
  27. 27. Home Buying 101: Acceptance of Offer  Enter Attorney Review (3 day period)  Officially begins upon delivery of signed contract to both parties not their attorneys. Both or either party have 3 days to enter into attorney review.  3 days of Attorney Review Period does not count weekends and holidays and does not begin until hours of business. For example, contracts signed and delivered on Friday at 6pm, does not begin review until Monday 9 am.  Either attorney can extend Attorney Review by “Disapproval of Contract” as written.  Both parties can end attorney review by “Approval of Contract” as written.  Any changes proposed by the attorneys during review must be acceptable to both sides. Home Buying Seminar - The O & A Home Team 27
  28. 28. Home Buying 101: Under Contract  Attorney Review ends when buyers & Sellers sign-off on acceptance letter agreeing to any/all attorney review changes  Both parties have a Binding Contract  2nd deposit is due (remainder of earnest monies) Home Buying Seminar - The O & A Home Team 28
  29. 29. Home Buying 101: The Home Inspections  Home Inspections (complete list next slide)  Schedule, Attend Inspections and Review Reports  Itemize findings of concern  Decide which are to be addressed by seller  Resolve home Inspection Issues with seller  If seller refuses to address MAJOR issues and buyer is unwilling to accept – parties are released from contract, earnest monies are returned. Home Buying Seminar - The O & A Home Team 29
  30. 30. Home Buying 101: The Home Inspections  Structure/Systems/Safety  Wood Destroying Insects  Structural Soundness  Mechanical Systems  Furnace/Air Conditioning  Appliances  Electrical Systems  Plumbing Systems  Exterior, Interior and Insulation  Safety Issues  Other findings (usually cosmetic in nature)  Evidence of past or current activity and/or damage  Environmental testing  Radon, Mold, Lead based paint  Other testing  Well Water  Septic System  Oil Tank Soundness Home Buying Seminar - The O & A Home Team 30
  31. 31. Home Buying 101: Mortgage Application  Buyer applies for mortgage  Buyer provide documents required by lender  Documentation reviewed by Loan Processor  Buyer is pre-approval with conditions, or  Lender not satisfied with soundness of buyer and denies mortgage – parties are released from contract and earnest monies are returned Home Buying Seminar - The O & A Home Team 31
  32. 32. Home Buying 101: Property Appraisal  Results of Property Appraisal  Property does not appraise for purchase price and mortgage is denied   Mortgage Contingency releases parties from contract, or Seller & Buyer can re-negotiate price in good faith and resume approval process  Property appraises for purchase price Home Buying Seminar - The O & A Home Team 32
  33. 33. Home Buying 101: Mortgage Underwriting  Underwriting Review of Loan Package and Appraisal Report -- Results:  Underwriter approve documentation  Underwriter conditionally approves documentation and requests more documentation to satisfy question(s).  Underwriter denies Mortgage – parties are released from contract and monies are returned to buyer.  Underwriter approves Mortgage Home Buying Seminar - The O & A Home Team 33
  34. 34. Home Buying 101: Mortgage Commitment  Mortgage Commitment Issued with minimal conditions  Mortgage Contingency is conditionally satisfied. Home Buying Seminar - The O & A Home Team 34
  35. 35. Home Buying 101: Settlement Services  Title Search is ordered and reviewed  Property (Parcel) Survey ordered and reviewed  Buyer purchase homeowners’ insurance  HUD statement and closing documents are prepared  Lender prepares mortgage documents for execution Home Buying Seminar - The O & A Home Team 35
  36. 36. Home Buying 101: Settlement Activities     Lender issues ready to close statement Seller vacates property; turns over keys Sellers’ Attorney provides Affidavit of Deed Lender releases funds to settlement agent/attorney  Buyer performs a final walk through of property accepts “as is” or with conditions (e.g. replace the missing refrigerator).  Buyer brings to settlement agent  State/Federally issued ID,  Certified funds (to complete closing costs),  Proof of homeowners insurance Home Buying Seminar - The O & A Home Team 36
  37. 37. Home Buying 101: At Closing Table  Documents are review and signed by parties  Property is exchanged for consideration     (money) Monies are held in escrow to remediate walkthrough findings (e.g. the missing refrigerator) Deed is transferred Buyer get keys and homeownership documents Congratulations!!! Home Buying Seminar - The O & A Home Team 37
  38. 38. Home Buying 101: Your Team of Professionals  Loan Officer  Affordability • Real Estate Attorney – Advocate – looks out for you – Legal Representation – Settlement Services  Pre-qualification  Down Payment Programs & Closing Cost Assistance  Loan Process Coordinator  Real Estate Agent  Agency – works for you  Finding the Right Home  Preparing Offer • Home Inspector – Assesses Property – Protects assets – Protects occupants  Negotiating the Offer  Managing the Transaction Home Buying Seminar - The O & A Home Team 38