Homebuyer Education: What You Need to Know

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1 Homebuyer Education: What You Need to Know

2 Today s Objectives Prepare your finances for home ownership Steps to mortgage prequalification Shopping for a home- who are the major players? Choosing the correct mortgage type and assessing mortgage fees Closing and moving in

3 Why Homeownership? Financial benefits: Mortgage interest tax deduction Deductible property taxes Building equity for future use Long-term retirement strategy Sense of stability and permanence

4 Preparing Your Finances Budget, Budget, Budget! Determining how much of a monthly payment you can afford is as simple as analyzing your monthly cash flow. Monthly Income (cash flow) Wages and salary $5, Investment Income $ Other Income $0.00 Total Monthly Income $5, Monthly Expenses Groceries $ Car Payments $ Car Maintenance $50.00 Gasoline $75.00 Clothing $ Student loan payments $ Medical expenses not covered by insurance $55.00 Automatic deposit, Savings account $ Retirement $ Credit card payments $ Insurance pyaments (car, life, halth, etc.) $ Income taxes, including Social Security $1, Restaurants $50.00 Charitable contributions $25.00 Vacations $ Entertainment $75.00 Other expenses $0.00 Total Monthly Expenses $4, Affordable Mortgage Payment $1, (Monthly Income - Expenses)

5 Tips for Budgeting Account for both fixed and variable expenses by tracking receipts and bills from the past 6-12 months. Anticipate and calculate occasional expenses and fluctuations in expenses. Both essential and discretionary expenses can be reduced. Track daily expenditures for at least a month to discover where your leaks are. Consider using an online budget tool, such as Finance Works, to make tracking simple A good budget always includes savings as an essential expense- building a savings and emergency fund should be a priority.

6 Tips For Budgeting: The Forgotten Expenses Replacing keys and locks Stocking your tool box Outdoor Supplies- lawnmower, gardening tools, snow removal equipment Window coverings Water and sewer bill Garbage removal

7 Preparing Your Finances: Check your Credit Your credit score is one of the largest determining factors in mortgage approval and mortgage rate. The difference between a 719 credit score and a 720 credit could mean the difference of a full 0.25% in rate. Order your credit report at least 6 months prior to purchasing in order to give enough time to clean up any errors in the report.

8 Preparing Your Finances: Calculate Your Ratios Housing Ratio compares your housing expenses to your before-tax income and is used by lenders in qualifying for a mortgage. Housing expenses include the total mortgage payment = principal, interest, property taxes, homeowners insurance, mortgage insurance, and association fees. Housing Expense Gross Monthly Income = Housing Ratio HOUSING RATIO < 33% to 36%

9 Preparing Your Finances: Calculate Your Ratios Debt-to-Income (DTI) Ratio compares your monthly debt to your before-tax income and is used by lenders to determine the likelihood that you will repay your mortgage debt. Your monthly debt includes items that are generally reported on your credit report, such as mortgages, car loans, student loans, and credit cards. Total Monthly Debt Gross Monthly Income = DTI Ratio DTI Ratio < 38% to 40%

10 Preparing Your Finances: Pre-purchase Expenses Down payment will be your largest expense. There are programs that require as little as 3% down, however 20% will give you the biggest rate and payment advantages. Closing costs can range from 3% to 5% of the total loan amount. Prepare to have a few months of mortgage payments in savings reserves. Don t forget moving expenses and any furniture or housing repair costs!

11 Preparing Your Finances: Bring It All Together

12 Before You Shop: Prequalification vs. Preapprovals Simple confirmation of the financial homework you ve already completed. Prequalification should happen before you begin your home shopping. Provide your lender with information on your income, assets, debt, and down payment. Credit report is not obtained. Lender to provide estimate of what you can afford for payment and purchase price in writing. No cost involved. No commitment on either side, therefore just viewed as a helpful estimate. Tentative commitment from a specific lender for mortgage funding. Preapproval should happen before you begin your home shopping. Provide your lender with documentation of your income, assets, and down payment. Credit report is obtained. Lender will provide a commitment letter stating how much money they are willing to lend for your purchase. Lender may charge an application fee. Preapproval is not binding to the lender, but the realtors and sellers will take you more seriously with this preapproval commitment.

13 Shopping for Your Home: Choosing an Agent 1. REALTORS and Real Estate Agents not all Real Estate Agents are Realtors 2. Referrals check with your family and friends 3. Search online check your local real estate companies and their profiles 4. Attend open houses meet agents in a non-threatening working environment and interact with them 5. Track neighborhood signs pay attention to how quickly an agent sells 6. Recommendations from the pros check with other agents, mortgage lenders, and real estate attorneys

14 Shopping For Your Home: Finding the Right One Type of Home Single Family Condos and Townhomes Co-Ops Location and Neighborhood What type of street is the house located on? Pay attention the home s surroundings Check out local amenities, including shopping areas, etc. School District Research information at the National Center for Education Statistics:

15 Shopping For Your Home: Rate the Inventory Use internet sites such as Realtor.com and Trulia.com to first define your search parameters - 80% of home searches begin on the Internet. Be prepared with a pen, notepad, and a digital camera.

16 Shopping For Your Home: Ten Things to Look For 1. Look at the kitchen appliances 2. Check the finishes and materials 3. Pay attention to the ceiling 4. Inspect the outdoor areas 5. Look at the neighborhood 6. Upgrades vs. standard amenities 7. Check out the bathroom amenities 8. Pay special attention to major systems 9. Ask about the homeowner added amenities 10. Request a paper trail

17 Dream House in Sight: Now What? Make an offer and wait for a reply Make a deposit and sign a contract Enter into attorney review- pay attention to the contingencies Schedule a home inspection

18 Questions to Ask Your Home Inspector 1. What does the inspection cover? 2. How long have you been practicing and how many inspections have you completed? 3. Are you specifically experienced in residential inspection? 4. How long will the inspection take? 5. How much will it cost? 6. Will I be able to attend the inspection? 7. Do you maintain membership in a professional home inspector association? 8. Do you participate in continuing education programs?

19 Shopping for a Mortgage: Know Your Options Fixed-Rate Mortgages Choose from 10-, 15-, 20-, 30-. and 40-year options Monthly payments remain the same for the life of the loan Bi-weekly payment options Fully amortized loans

20 Shopping for a Mortgage: Know Your Options Adjustable-Rate Mortgages Interest rate is fixed for a period of time Generally the initial interest rate is lower as the future risk for higher rates is shared between borrower and lender 4 components of ARMs: initial interest rate, adjustment interval, index, margin Safeguard: interest rate caps Safeguard: monthly payment caps Convertibility: change your ARM to a fixed-rate mortgage

21 Shopping for a Mortgage: Know Your Options FHA (Federal Housing Administration) Mortgages FHA insures loans, minimizing the default risk lenders take when buyers put down less than 20% Minimum down payment = 3.5% for credit score 580+ Minimum down payment = 10% for credit score <580 Allowable debt ratios are higher than conventional loans Mortgage insurance premium of 1.5% is funded into the loan

22 Shopping for a Mortgage: Know Your Options VA (Veterans Affairs) Mortgages Available to veterans of the U.S. Armed Services One of the only loan options to offer 100% financing No mortgage insurance requirements, even on LTVs above 80% Must pay the VA Funding Fee, ranging from 2.4%-1.5%, depending on down payment and position Higher allowable debt-to-income ratios than other loan options

23 Shopping for a Mortgage: Additional Terms PMI (Private Mortgage Insurance) Required by the lender if down payment is less than 20% Research options to cancel PMI Premiums vary based on credit score, property type, LTV Upfront and monthly payment options available Lending Limits Conforming loans maximum limits established by Fannie Mae and Freddie Mac Jumbo loans loans above the maximum conforming limits

24 Good Faith Estimate: Understanding the Fees The Good Faith Estimate (GFE) must be provided by the mortgage broker or the mortgage lender within three business days of applying for the loan. Six Categories of Fees Lender Fees Prepaid Fees Escrow Reserves Title Charges Government Charges Additional Charges

25 Good Faith Estimate: Lender Fees Typical lender fees might include: Loan Origination Fee (percentage on loan amount) Loan Discount Fee (percentage of loan amount) Underwriting Fee ($150-$325) Document Preparation Fee ($75-$325) Administrative Fee ($390-$550) Credit Report ($15-$60) Tax Service Fee ($58-$89) Appraisal Fee ($325-$500) Flood Certification Fee ($11-$25)

26 Discount Points: To Pay or Not To Pay? Discount points are paid by the borrower to lower the rate, thereby lowering the monthly payment. Consider how long you plan to stay in the house: Discount Points 0 1 Cost of Points $0.00 $2,000 Mortgage Rate 6.00% 5.75% Monthly P&I $1,193 $1,162 Total Out-of-Pocket Year 1 $14, Year 2 $28,632 $29,888 Year 3 $42,948 $43,832 Year 4 $57,264 $57,776 Year 5 $71,580 $71,720 Year 6- Breakeven $85,896 $85,664 Year 10 $143,160 $141,440 Year 20 $286,320 $280,880 Year 30 $429,480 $420,320

27 Good Faith Estimate: Prepaids and Escrows Homeowners Insurance full year prepaid Prepaid Interest daily interest cost from the day of the closing through the end of that month Escrows required reserves by your lender Property Taxes Homeowners Insurance Flood Insurance

28 Good Faith Estimate: Title Charges Title Insurance is an insurance policy that guarantees the property title is free from the problems of hidden liens and claims. Lender s policy / Owner s policy Title Fees may include the following: Title insurance (rate is based on state) Closing Fee / Settlement Fee / Attorney s Fee ($350-$800) Abstract or Title Search ($150-$225) Title Examination ($0-$400) Document Preparation ($0-$100) Notary Fees ($7-$20) Courier Fee / Overnight Fee ($0-$100)

29 Title Charges: Shopping for Title Insurance Tips to consider: If shopping for both lender/owner policies, ask if you are being given a discount for multiple policies. Find out how the rate is calculated and ask to see the rate manual to confirm insurance charges. First-time homebuyers may be eligible for an additional discount. Check to see if the property you are buying has been re-sold in the last 5 years. See if your property insurance company offers title insurance in order to get a better rate by bundling insurance. Always do your comparison shopping!

30 Good Faith Estimate: Government Charges Charges to the county and state typically include: Recording Fees fees collected to pay the county clerk for recording the new deed and mortgage documents. Tax Stamps fee depends on location Transfer Tax fee may be charged to seller or buyer depending on state REMEMBER- DO YOUR HOMEWORK!!!

31 Good Faith Estimate: What You Need to Know Fees that cannot change Fees that can increase up to 10% at closing Fees that can change at closing Lender s origination charge Discount points for the specific rate lock Adjusted origination charge (after rate is locked) Transfer taxes Required services the lender selects Title services and lender s title insurance (if recommended by lender) Owner s title insurance Required services you can shop for (if recommended by lender) Government recording charges Required services that you can shop for (if you select) Title services and lender s title insurance (if you select) Owner s title insurance Initial deposit for your escrow account Daily interest charges Homeowner s insurance

32 Final Steps: Closing and Moving In Final walk-through- check the condition of the property Meet for settlement and sign all paperwork Transferring utilities- research your options and comparison shop at: www. Whitefence.com File all settlement documents in a fireproof safe. Take pictures or video of your home and your possessions for insurance purposes.

33 Lastly. Enjoy your new home!!!

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