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Buying Your First Home

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  1. Buying Your First Home Presented by (Name, CPA) Member, The Ohio Society of CPAs

  2. 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)

  3. 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)

  4. 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

  5. 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

  6. 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)

  7. 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

  8. 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)

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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

  17. 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

  18. 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

  19. 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

  20. 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

  21. 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

  22. 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

  23. 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

  24. 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

  25. 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)

  26. 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

  27. 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

  28. 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

  29. 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)

  30. 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

  31. Questions? Comments?

  32. 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