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Buying Your First Home. Presented by (Name, CPA) Member, The Ohio Society of CPAs. Statistics: U.S. Home Ownership. 92 % of Americans surveyed recently believe a home is a good investment for the future

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buying your first home

Buying Your First Home

Presented by

(Name, CPA)

Member, The Ohio Society of CPAs

statistics u s home ownership
Statistics: U.S. Home Ownership

92 % of Americans surveyed recently believe a home is a good investment for the future

But nearly 48% worry about losing their home or being unable to afford the home they are in

(Source: Bankrate.com survey from July 2009)

statistics u s home ownership3
Statistics: U.S. Home Ownership

One-quarter of American homeowners owe more on their mortgage than their homes are worth (Source: Moody's Economy.com)

In the past three decades, the average annual return on residential real estate was 5.92%

(Source: Bankrate.com survey from July 2009)

so you want to buy what now
So you want to buy? What now?

Create a budget

This will help you determine how much house you should buy.

  • Rule of thumb: 2½ x salary

True cost is more with mortgage and taxes

Budget fixed costs such as loan payments, utilities, insurance payments, food, clothing and all necessities

so you want to buy what now5
So you want to buy? What now?

Create a budget

What is left for a mortgage?

Do you have at least 6 months in savings to cover financial crisis? Do not touch this for a down payment

Many banks offer free classes that will walk you through the steps of buying a home

use existing credit wisely
Use existing credit wisely

Establish credit if you don’t have it

This can be a low-interest credit card that you use wisely and pay in full each month, an auto or other loan

Rule of thumb: use no more than 25% to 30% of your available credit. ($600 balance on a credit card with a $2,000 limit)

know your credit history
Know your credit history

Lenders want to know you can repay your mortgage

Your credit score is an indication of how well you have managed your past finances

Scores of 700+ qualify for the lowest mortgage rates

know your credit history8
Know your credit history

Request a free copy of your credit report annually from www.annualcreditreport.com

Consider paying for a copy of your current credit score (not included in the free report)

repair your credit
Repair your credit

Contact financial institutions directly to resolve errors or disputes before applying for a mortgage

Pay off some of your existing debts, such as high interest credit card balances

Pay your bills on time

Do not apply for credit you do not need, such as department store cards you will rarely use

shop for mortgage rates and terms
Shop for mortgage rates and terms

Interest is the expense the lender charges the borrower for the use of the lender's money

Interest is repaid over the life of the loan

shop for mortgage rates and terms11
Shop for mortgage rates and terms

Your monthly payment on a fixed-rate loan is the same, but you pay more of the interest in the early years of the loan

Lenders loan money to people at different rates determined by their creditworthiness—their likely ability to repay the loan based on their past financial activity

fixed or adjustable rate
Fixed or Adjustable Rate?

Fixed Rate

Usual term is thirty (30) or fifteen (15) years

Interest rate is locked over the life of the loan and so is the monthly principal and interest payment (excluding taxes and insurance)

Downsides: lenders may charge higher rates to compensate for market fluctuations over time

fixed or adjustable rate13
Fixed or Adjustable Rate?

Adjustable Rate

Beginning rate is lower than fixed rate loans, but rate may change annually

Lenders sometimes offer low “teaser” rates in the first two years

Ask lender to disclose in writing the fully-indexed interest rate so you don’t become ‘upside down in your mortgage’—meaning you owe more than your home’s current value because the interest rate rose dramatically

shop for mortgage rates and terms14
Shop for mortgage rates and terms

Shop around for the best rates

Do not give lenders permission to ‘run your credit’ for a rate quote before you are ready for preapproval

Each credit activity ‘hit’ can lower your score and raise your rate when you apply for a mortgage

Ask lenders to quote a rate ‘in theory’ based on the score you provide from your free reports

where to go for rates
Where to go for rates

Start with the Home section of your Sunday newspaper (chart of loans from local lenders showing current rates on fixed and adjustable rate mortgages)

Online sites where you can get multiple quotes with one request (www.bankrate.com)

Call local banks and financial institutions

where to go for rates16
Where to go for rates

Ask for interest rates on a specific amount, as well as loan origination fees and closing costs

Many banks have an online calculator you may use to determine estimated monthly payments

Many realty companies also own mortgage companies. Rates can sometimes be better but remember to ask about any other fees they charge and still shop around

what determines your monthly payment
What determines your monthly payment?

The price of the home and the amount you borrow

Interest rate of your loan and whether it is fixed or an adjustable rate mortgage

Local taxes if you pay them in ‘escrow’

Homeowner’s, flood or fire insurance if paid in escrow

what determines your monthly payment18
What determines your monthly payment?

Private Mortgage Insurance—it may be required if you are financing more than 80% of the value of the home (cancel when principal drops below 80 percent)

Rolling closing costs into the loan rather than paying these out of pocket

Automatic deduction of payments may reduce your rates

learn about preapproval
Learn about Preapproval

Preapproval is a formal process initiated by the lender to help you determine how much money you are qualified to borrow

Many realtors will not work with buyers until they have been preapproved for a mortgage

learn about preapproval20
Learn about Preapproval

It involves an application, a fee, verification of income and/or some assets, and a credit check

Do not agree to pre-approval unless you are comfortable moving forward with a particular lender.

Preapproval is not a guarantee that you will be approved for the actual loan

before you apply
Before you apply

Lenders will want your financial history.

Gather these items:

Recent pay stub or other proofs of income

Latest income tax return

Total and types of outstanding debt (auto or college loans, credit card debt, etc.)

Your credit report and credit score

finding your dream home
Finding your dream home

Make a list of ‘must haves’ to focus your search:

Price of home and potential for appreciation

Location or neighborhood

Quality of construction, age, and condition of the property

Style of home and lot size

finding your dream home23
Finding your dream home

Make a list of ‘must haves’ to focus your search:

Number of bedrooms and bathrooms

Quality of local schools

Crime level of the area

Property taxes

Proximity to shopping, schools, and work

finding your dream home24
Finding your dream home

Use a real estate agent or broker. They can:

Show you properties and neighborhoods in your price range and provide insight into market activity and tax rates

Suggest sources and techniques for financing

Prepare and present an offer to purchase

finding your dream home25
Finding your dream home

Use a real estate agent or broker to:

Act as an intermediary in negotiations

Recommend professionals such as lawyers, mortgage brokers, title professionals, home inspectors)

Disclose positive and negative aspects of properties (e.g. houses in desirable school districts have higher re-sale value)

working with an agent or broker
Working with an agent or broker

Ask how he/she will be compensated (i.e., flat fee or commission based on a percentage of the sale price)

Many states require the agent or broker to disclose this information to you up-front and in writing

tax incentives of home buying
Tax Incentives of home buying

First-time homebuyers who purchase before 12/1/2009 may qualify for a one-time credit on 2009 tax return

Calculating the credit: 10 percent of the purchase price up to $8,000, or $4,000 for married individuals filing separately

tax incentives of home buying28
Tax Incentives of home buying

Credit phases out beginning with adjusted gross income of $75,000 ($150,000 for joint filers)

Credits for 2009 purchases do not need to be repaid as long as the home remains the primary residence for 36 months after date of purchase

tax incentives of home buying29
Tax Incentives of home buying

The Housing and Economic Recovery Act of 2008

Homeowners can claim an additional standard deduction for property tax if the taxpayer does not itemize. Claim the lower of:

  • Real estate property taxes paid in 2009 to state and local governments; or
  • $500 ($1,000 if married filing jointly)
compensation and payroll taxes
Compensation and Payroll Taxes

Key issue facing small businesses:

  • Wage income v. Self-employment income
  • Make the distinction
  • Sole proprietors may prefer to pay themselves in the form of wages
thank you
Thank You

If you have any questions or would like to discuss home buying or other financial matters, please contact me:

  • Name, CPA
  • Company
  • Address
  • Email,
  • Phone