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Objective 2.03 Analyze financial and legal aspects of home ownership. So you want to buy a house…. Most people need to borrow money called a mortgage Mortgages are contracts outlining terms of a loan between lenders and borrowers L oans are repaid monthly over a term of 15-30 years.
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Objective 2.03Analyze financial and legal aspects of home ownership
So you want to buy a house… • Most people need to borrow money called a mortgage • Mortgages are contracts outlining terms of a loan between lenders and borrowers • Loans are repaid monthly over a term of 15-30 years.
Fixed Rate Mortgages(interest rate and monthly payment are constant) • Conventional • FHA-insured: (Federal Housing Administration) guarantees mortgages made to those with low-medium credit • VA loan: loan guaranteed by the Veterans Administration.
Estimating What You Can Afford • Multiply two-and-one-half times your annual gross income (income before deductions) • Gross income X 2.5 = price of house you can afford • Buyers must also have a down payment of at least 5%. This is a part of the purchase price that must be paid in cash!
Down Payment Calculation • Example: $72,000 with 10% down payment • Cost of house = $72,000.00 • 10% down payment = $7200 • Amount to finance = $64,800 • Example: $72,000 with 20% down payment • Cost of house = $72,000.00 • 20% down payment = $14,400.00 • Amount to finance = $57,600.00 • Larger the down payment, the smaller the mortgage!
Qualifying for a Loan • Housing to Income Ratio: ALL of your housing costs should equal no more than 28% of your gross monthly income • Includes mortgage payment, property taxes, insurance, utilities, repairs, maintenance • Debt to Income Ratio: Monthly housing costs plus other long-term debts should total no more than 36% of your gross monthly income • Long-term debts are those that take longer than 10 months to repay • BOTH ratios must be met to qualify for a loan!
The Purchasing Process • Agreement of sale or purchase agreement: • States all the conditions of the sale • Earnest Money: • Money potential buyer pays to show they are serious • Money is held and applied to the cost of the house or refunded if the buyer cannot get a loan.
Abstract of title or title search: • Makes sure the seller is the true owner of the house • Makes sure there are no debts on the house • Survey: • Makes sure property lines are accurate.
Inspections: • General home inspection (roof, heating and cooling systems, structural problems, safety issues) • Termite inspection • Secure a mortgage • Today most buyers become pre-approved.
Closing: • Buyer takes ownership of property • Involves seller, buyer, lawyers, and real estate agents • Closing costs are paid • Origination fees: paid to lender for processing loan • Appraisal fee: paid for determining the value of the property • Other fees for lawyers, real estate agents, etc. Some of the money will be held in escrowfor property taxes and insurance.
Advantages of Owning a Home • Sense of freedom and independence • Financial advantages: • Helps establish a good credit record • Interest and property taxes are deductible • Houses usually increase in value – this is called equity.
Equity Example • Mary owns a house. She currently owes $90,000 on her mortgage. She has decided to sell her house and buy a new one • Mary’s real estate agent sells Mary’s house for $140,000 (market value) • Mary paid off her mortgage of $90,000 • How much money did Mary make when she sold her house? • Mary made$50,000. This is called equity. • Mary used her equity as a down payment on a new home.
Disadvantages of Owning a Home • Strain on finances- property taxes, insurance, and maintenance • Uses up lots of your free time • Foreclosure if you get behind on monthly payments • Limited mobility.
