Chapter Objectives To determine how much you can afford to spend on - - PDF document

Chapter 8. Housing Chapter Objectives

To determine how much you can afford to spend on housing To compare whether it is financially more attractive to buy or rent To explain the real estate transaction from appraisal to closing To understand the basics of different kinds of mortgages To know how to handle a potential foreclosure

How much housing can you afford?

Typically, experts recommend that you spend no more than 1/3 of your gross monthly income on shelter Shelter includes:

Fixed payments: mortgage, property insurance, home insurance, Variable payments: utility bills, home repairs

What are the rental prices in your area?

HUD 2004 Fair Market Rent by Number of bedrooms in Salt Lake City-Ogden area (includes all utilities other than telephone)

1 bedroom: $579 2 bedrooms: $682 3 bedrooms: $960 4 bedrooms: $1,118

For more information, go to HUD website at http://www.huduser.org/datasets/fmr.html

Cannot afford the rent for the place you want?

If 1/3 of your monthly gross income is less than the fair market rent, you can try

To look for the lower end of the rental market To share and apartment or a house To apply for subsidized housing

It is not advisable to spend more than you can afford.

If you own or are thinking about owning

Same 1/3 rule applies. That is, the combination of your mortgage payment, your property tax, your homeowner’s insurance, your utilities bills other than telephone, and your home maintenance should not exceed 1/3 of your gross monthly income.

So how expensive of a house can you afford?

The answer will depend on several things:

The down payment you have saved

• You can afford more if you have a large down

payment

The mortgage interest rate

• You can afford more if mortgage interest rates

are low

How much other debts you owe

• You can afford more if you have little other

debts.

How much down payment should you save?

It usually a good idea to put 20% of the house price as your down payment. That way, you don’t have to pay private mortgage insurance, which can be expensive. These days, you can buy a house with very little down payment. However, you need to be sure you can afford your monthly payment (including private mortgage insurance) and

• ther housing related expenses.

How high are the mortgage interest rates?

Rates vary a lot over time.

Effective Interest Rate on Fixed-Rate Mortgage 1985-2004

0.00 5.00 10.00 15.00 1 9 8 5 1 9 8 7 1 9 8 9 1 9 9 1 1 9 9 3 1 9 9 5 1 9 9 7 1 9 9 9 2 1 2 3 Year Effective rate (%)

Mortgage interest rate also vary depending

• n your credit history, the kind of loan you

take, and the amount you borrow. For more information, visit the Monthly Interest Rate Survey by the Federal Housing Finance Board at http://www.fhfb.gov/MIRS/mirs.htm For up-to-date rate information, see bankrate.com at

http://www.bankrate.com/brm/rate/mt g_home.asp

How expensive of a house can you afford to buy?

• 1. Annual gross income

$75,600.00

• 2. Monthly gross income

$6,300 Housing Expense Test

• 3. Housing expense-to-income ratio

28%

• 4. Allowable housing expenditure

$1,764

• 5. Estimated nonmortgage housing payment

340

• 6. Affordable monthly mortgage payment under housing

$1,424 expense test

Housing Expense Test Debt Repayment Test

• 7. Debt repayment-to-income ratio

36%

• 8. Allowable debt payment

$2,268

• 9. Monthly installment debt and alimony

$474

• 10. Total nonmortgage expense and installment

$814 debt repayment

• 11. Affordable monthly mortgage payment

$1,454 under debt repayment test

How does debt affect me ? - The debt repayment test

Your Affordable Home Purchase

• 12. Affordable monthly mortgage

$1,424 (lesser of Line 11 or Line 6) ** Contract rate on home mortgage 8.00% ** Duration of loan (months) 360.00

• 13. Monthly payment per $1,000 mortgage

$7.34

• 14. Your affordable mortgage

$194,068

• 15. Fractional amount borrowed

0.80

• 16. Your affordable home purchase

$242,585 Required Down Payment $48,517

So what’s the bottom line?

How much housing can $242,585 buy?

Depending on the location Median sale price of existing single family houses in 1st quarter 2005

Salt Lake City – Ogden: $158,000 San Francisco Bay area: $641,700 South Bend/Mishawaka, IN: $93,600

For more information, visit the website for National Association of Realtors at

http://www.realtor.org/Research.nsf/file s/REL05Q1T.pdf/$FILE/REL05Q1T.pdf

How affordable are houses in general?

Typically, places that have higher housing prices also tend to have higher wage rates. So prices alone don’t tell the whole story. Over time, household income also increase. So if income keeps up with housing price increase, then houses are not less affordable. The Housing Affordability Index takes these factors into consideration.

The larger the index, the more affordable houses are.

What is Housing Affordability Index

An index of 100 means a family earning median income can qualify for a conventional loan on an existing median-priced home. The larger the number, the more affordable houses are relative to median income in the U.S. For the second quarter of 2005, the housing affordability index in the U.S. was 117.1.

Meaning: If a family earns about 85.4% (100/117.1) of median income in the U.S., then this family can qualify for a conventional loan to buy an existing median-priced home. For more information about Housing Affordability Index, go to http://www.realtor.org/Research.nsf/files/REL0506A.pdf/$FI LE/REL0506A.pdf

Pluses Appreciation Tax Advantage Privacy Negatives Immobility Sales Commissions Maintenance Financial Risk Pluses Mobility Low Maintenance Low Risk Negatives Landlord restrictions No equity buildup No tax advantage

Buying Renting Vs. Tax advantages for home purchase

Itemized property tax deduction Itemized mortgage interest deduction Tax exempt capital gain

You can typically exclude from taxable income up to $250,000 ($500,000 if married) of the capital gain on the sale of your home To get the full exclusion you must have owned the home for the last two years, and used it as your main home for two recent year

Buying vs. Renting Comparison Bottom Line

Buying is better

The longer the holding period The lower the mortgage interest rate The higher your marginal income tax rate The lower the local property tax rate The more financial risk tolerant you are

The opposite is true for renting

The process of buying

The Real Estate Agent Finding the house you want and can afford The Purchase Contract The Home Inspection The Title Search The Mortgage Decision The Closing

The agent

Seller’s agent: represent seller Buyer’s agent: represent buyer In Utah, a seller’s agent can also represent buyers in a limited capacity. Issue of commission: typically, seller pays commission, unless otherwise specified.

Finding the house you want and can afford

The realtor will show you houses listed for sale on Multiple Listing Services (MLS) that fit your criteria You can also access MLS at http://www.utahrealestate.com/ Read Newspaper ads for “for sale by owners”. There are several for-sale-by-owner websites. Go to open houses

Elements of the Purchase Contract

A sample purchase contract

Purchase price and earnest money Title Mortgage clause Pests Home inspection Lead-based paint hazards in housing built before 1978 Other environmental concerns Home warranty Sharing of expenses Settlement agent/Escrow agent Settlement costs

The Home Inspection

Freddie Mac:

http://www.freddiemac.com/sell/consumerkit/english Interviewing the owners and/or occupants Conducting the consumer home inspection The final analysis

The American Association of Home Inspectors (ASHI): http://www.ashi.com

Title Search – done by title insurance company

An examination of the public records in order to determine who may have enforceable claims

• n the property

Deed

a written document transferring title

Marketable title

title free of claims by other parties

Title insurance

protects the insured against defective title

New home: builder’s warranty Resale: home buyer’s warranty

Home Warranties

Getting a Mortgage

Mortgage brokers Government programs

Federal Housing Administration (FHA)

• protects the lender against loss on the mortgage
• Minimum 5% down payment
• maximum limits on the loan at

http://www.huduser.org/datasets/il.html

Veterans Administration (VA)

• loan guarantees by the Veterans Administration
• borrowers may have a debt repayment to income ratio of

41%

• interest ceiling may require discount points
• http://homeloans.va.gov/veteran.htm

Types of Mortgages

Fixed Rate Mortgages

interest rate and monthly payment remain constant over the life of the loan

Adjustable Rate Mortgages

interest rate is periodically adjusted over the term

• f the loan

the monthly payment may change over the term

• f the loan, or the term of the loan may change

The initial rate (called teaser rate) is low. Rate usually increases after the first year.

Specialize Mortgage Formats

Graduated Payment Mortgage (GPM)

Scheduled increases in monthly payments

• ver the term of the loan

Shared Appreciation Mortgage

Lender shares in home’s appreciated market value Interest rate, points, and other fees

APR – most important for comparison Points: 1 point = 1% of loan

Lender required settlement costs

Appraisal Credit report Mortgage insurance (if down payment < 20%) and title insurance Processing fees

Comparing and getting a mortgage

Reading the fine print

Prepayment penalty Escrow account Acceleration clause Due-on-sale clause

The Closing

Meeting at which the sale is finalized and the title transferred Closing costs

Government charges Lender charges Other sales related charges Government charges

• Prorated taxes
• Recording fees
• Transfer taxes

Lender Charges

• Appraisals
• Attorney fee (lender)
• Credit report
• Doc. prep
• Insurance
• Inspections (lender)
• Land survey
• Mortgage insurance
• Origination fees
• Points
• Prepaid interest
• Title insurance

(lender)

• Title search

Other sales related charges

• Attorney fee (buyer)
• Inspections (buyer)
• Real estate commissions (seller)
• Title insurance (buyer or seller)

View a sample of settlement costs at http://www.hud.gov/offices/hsg/sfh/res /sc3sectd.cfm

Foreclosure

Legal process for terminating the borrower’s rights to property and force its sale If you miss payments the lender may have the right to foreclose on the loan You receive any excess of the sale price over the amount needed to discharge the loan Loan renegotiation may be an alternative

Selling Your Home

Appraisal For Sell by Owner or Hire a Realtor Realtor and Listing Agreement Price Negotiation Purchase Agreement The Closing Appraisal

Appraiser - licensed View an appraisal form at http://www.freddiemac.com/sell/forms/pdf /70.pdf Listing agreement needed if hiring an agent A contract providing the real estate agent with authority to represent the seller in return for a commission on sale. Some variations

Exclusive right to sell

• commission no matter who sells the property

Exclusive agency agreement

• commission may be shared with other agents
• if you locate buyer, you don’t pay

Open agreement

• commission goes to agent who locates a buyer

Net listing agreement (prohibited in Utah)

• seller receives predetermined amount on sale

Price negotiation

Offer and counteroffers

Purchase agreement

Fix things stated on the contract

The closing

Title company Realtor’s commission paid

Assignment for Chapter 8

Figure out how expensive of a house you can buy given your current income and current market interest rate. Use the MLS to find a house in the area you want and with a price you can afford. Investigate mortgage options that might fit your needs.