Home Buying 101: Ignorance Can Cost You

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

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.


2

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.


3

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


4

Home Buying 101: Real Affordability
 Use Mortgage “Payment” Calculator to determine

true cost to YOUR budget
 http://richhoskins.tridentmortgage.com/


5

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


6

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


7

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


8

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.


9

Home Buying 101: Benefits
 Tax Benefits
 Claim Itemized Deductions
 Mortgage Interest Deduction
 Property Tax Deduction


Consult your tax professional


10

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.


11

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


12

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


13

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


14

VA financing
 0% down,
 Allows gifted money for closing
 For eligible US veterans only
 http://www.benefits.va.gov/homeloans/elig2.asp


15

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


16

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


17

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


18

 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


19

 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)


20

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


21

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!


22

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.

23

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.


24

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.


25

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.


26

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.


27

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)


28

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.


29

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


30

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


31

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


32

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


33

Home Buying 101: Mortgage Commitment
 Mortgage Commitment Issued with minimal

conditions
 Mortgage Contingency is conditionally
satisfied.


34

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


35

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

36

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!!!


37

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


38

Home Buying 101: Ignorance Can Cost You

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