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Buy a Home
Is it time to buy your own home? Here are six steps that will lead to a great transaction. Please call me, Ruth Blackwell, 907-789-3888 or e-mail me: ruth@aukelake.com for further information.
- Is it the right time to make the move to home ownership?
- Prepare to Qualify
- PMI - Private Mortgage Insurance
- Oh,…so many Mortgages
- Check your credit report
- Documents required to qualify for a loan
- Things not to do before purchasing a home
- The perfect home for you
- Home size matters
- Neighborhood
- Real Estate Licensees- Representation in Alaska
- You found the house – how the home becomes yours
- Requirements for closing
- Buyer's remorse - did you make a huge mistake?
- Forms for buyers
IS IT THE RIGHT TIME TO MAKE THE MOVE TO HOME OWNERSHIP?
Home ownership isn't for everyone.
- Are your ready for a long term commitment?
- With all the financing, closing costs and other expenses associated with owning a home, you should not plan to sell within 5 years.
- You also have to think about the upkeep of a home. Everything from cutting the grass to putting on a new roof is your responsibility. The costs can really add up. Then add taxes, water and sewer bills and other expenses and you can get into some sizable payments.
- But when you take full financial and maintenance responsibility for a home, it's yours to do what you please. Paint the walls purple. Add a planetarium. Put in a fireman's pole. You're in charge.
- There are also substantial financial advantages to owning a home. The part of your monthly payment that goes towards the principal is all equity and the part that goes towards interest is tax deductible. Compare that with paying rent, which is neither an investment nor a tax write-off.
- As your equity increases with time (and payments) it will be a source of financial stability for you, giving you collateral for a loan or producing a large sum of money if you sell.
- And if you decide to sell your home, as long as you have lived in it for two of the past five years, you won't have to pay tax on gains of up to $250,000. The limit doubles to $500,000 if you're married and both have lived in the home for two years.
A Personal Residence is your best investment.
As a fairly general rule, homes appreciate about four or five percent a year. Some years will be more, some less. The figure will vary from neighborhood to neighborhood, and region to region.
Five percent may not seem like that much at first. Stocks (at times) appreciate much more, and you could easily earn over the same return with a very safe investment in treasury bills or bonds.
But - do the numbers-
If you bought a $200,000 house, put 20% down, and took out a mortgage for $160,000. You will have an investment of $40,000.
At an appreciation rate of 5% annually, a $200,000 home would increase in value $10,000 during the first year. That means you earned $10,000 with an investment of $40,000. Your annual "return on investment" would be a whopping twenty-five percent.
You will be making mortgage payments and paying property taxes. The interest on your mortgage and your property taxes are both tax deductible. This will reduce your taxable income at the end of the year.
Your rate of return when buying a home is higher than most any other investment you could make.
Income Tax Savings
All of the interest and property taxes you pay in a given year can be deducted from your gross income to reduce your taxable income.
Property taxes are deductible, too. Whatever property taxes you pay in a given year may also be deducted from your gross income, lowering your tax obligation.
Stable Monthly Housing Costs
When you rent a place to live, you can certainly expect your rent to increase each year - or even more often. If you get a fixed rate mortgage when you buy a home, you have the same monthly payment, for the principle and interest will remain the same thirty years. Even if you get an adjustable rate mortgage, your payment will stay within a certain range for the entire life of the mortgage.
Imagine how much rent might be ten, fifteen, or even thirty years from now? Which makes more sense?
Forced Savings
A house can be an automatic savings account. You accumulate savings in two ways. Every month, a portion of your payment goes toward the principal. Admittedly, in the early years of the mortgage, this is not much. Over time, however, it accelerates.
Second, your home appreciates. Average appreciation on a home is approximately five percent, though it will vary from year to year, and in some years may even depreciate... Over time, history has shown that owning a home is one of the very best financial investments.
PREPARE TO QUALIFY
- You need to get your finances in order, save for a down payment and mentally prepare for the responsibility of owning a home.
- Down payment- is usually expressed as a percentage of the price of the house. A $10,000 down payment on a $100,000 house would be a 10% down payment.
- Different loan programs require different amounts, between 3% and 10% depending on the program, and often give better interest rates for down payments larger than 10%. Some programs even will let you put 0% down.
- Special programs that may offer down payment assistance or reduced down payment requirements. Local lenders can provide information on the programs.
- You will need funds for closing costs and fees and you'll be in much better financial shape when you move in if you've given yourself a little padding.
- Save as much cash as you can.
PMI- PRIVATE MORTGAGE INSURANCE
- If you put less than 20% down on your home, you'll be charged PMI, Private Mortgage Insurance, as part of your monthly house payment. This insurance protects the lender from loss if you default on your loan and the lender has to sell your home to recover its money.
- Once your loan principal drops to 80% of the total value of your home, either through paying loan principal or increasing the value of your home, you will no longer have to pay PMI.
- PMI can be a very substantial cost, as much as 20% of your monthly payment, so get rid of it as soon as you can.
CHECK YOUR CREDIT REPORT
- Becoming familiar with your credit report is an important part of financial fitness at all stages in life.
- The better your credit rating, the better interest rate you're likely to get.
- So while you're taking the time to save money for a down payment, take some time to get your credit report in order.
- Your first step is to get a copy of your credit report as soon as possible.
Contact one of the three major credit bureaus:
- If there are any errors on your credit report, contact the credit agency immediately.
- Here are ways to legally fix your credit.
- If you have poor debt ratios, meaning too much debt compared to your income, start paying down your debt.
- But it's crucial in repairing your credit and getting favorable interest rates.
- If you have insufficient credit history, you're in a good position to build good credit.
- If you can, get a credit card and be sure not to carry a balance on it. Be sure to pay it off every month because those cards can have extraordinarily high interest rates.
- Whenever you apply for credit, the inquiry by the potential creditor shows up on your credit history.
- If you have too many inquiries on your credit history, you need to play the waiting game. Stop applying for credit...
If you need a house now, and do not have time to “fix your credit”
Three things determine mortgage interest rates:
- Your credit history,
- Amount of your down payment and
- Your current income.
You can get a loan if you do one or all of the following:
- Increase your down payment and income to make up for it.
- Pay a higher interest rate
DOCUMENTS REQUIRED TO QUALIFY FOR A LOAN
- The past two or three years of tax returns
- Paychecks or pay stubs for the past month that include your social security number
- W-2 forms for the past two to three years
- Recent credit card statements
- Payment records for all other loans
- Bank account statements for the past three months
- Brokerage account statements for the past three months
- Retirement account statement
- Your car title(s)
- Business tax filings if you are self-employed
- If you're selling a house, the sales contract
- Any bankruptcy documents
- Life insurance policies
- Documentation of any other sources of income, including a second job, anticipated overtime, sales commissions, bonuses, interest and dividend income, Social Security payments, alimony, child support, etc.
- If your employer is offering relocation assistance, a documented agreement
- A complete list of creditors, including minimum monthly payments and balances
- Cancelled checks from recent rent payment
You might hear from the loan officer- “if only you did not have a car payment”
Debt-to-Income Ratios and Car Payments
When determining your ability to qualify for a mortgage, a lender looks at what is called your "debt-to-income" ratio. A debt-to-income ratio is the percentage of your gross monthly income (before taxes) that you spend on debt. This will include your monthly housing costs, including principal, interest, taxes, insurance, and homeowner's association fees, if any. It will also include your monthly consumer debt, including credit cards, student loans, installment debt, and...
...car payments.
How a New Car Payment Reduces Your Purchase Price
For example, suppose you earn $5000 a month and you have a car payment of $400. At current interest rates (approximately 8% on a thirty-year fixed rate loan); you would qualify for approximately $55,000 less than if you did not have the car payment.
Even if you feel you can afford the car payment, mortgage companies approve your mortgage based on their guidelines, not yours. Do not get discouraged, however. You should still take the time to get pre-qualified by a lender.
However, if you have not already bought a car, remember one thing. Whenever the thought of buying a car enters your mind, think ahead. Think about buying a home first. Buying a home is a much more important purchase when considering your future financial well being.
THINGS NOT TO DO BEFORE PURCHASING A HOME
Major Purchase of Any Kind
Do not make any major purchase that would create debt of any kind. This includes furniture, appliances, electronic equipment, jewelry, vacations, expensive weddings...
...and automobiles, of course.
Don't Move Money Around
When a lender reviews your loan package for approval, one of the things they are concerned about is the source of funds for your down payment and closing costs. The lender may ask you to provide statements for the last two or three months on any of your liquid assets. This includes checking accounts, savings accounts, money market funds, certificates of deposit, stock statements, mutual funds, and even your company 401K and retirement accounts.
If you have been moving money between accounts during that time, there may be large deposits and withdrawals in some of them.
The mortgage underwriter (the person who actually approves your loan) may require a complete paper trail of all the withdrawals and deposits. You may be asked to produce cancelled checks, deposit receipts, and other seemingly inconsequential data, which could get quite tedious.
Should You Change Jobs?
For most people, changing employers will not really affect your ability to qualify for a mortgage loan, especially if you are going to be earning more money. For some homebuyers, however, the effects of changing jobs can be disastrous to your loan application. It is best to stay in your current job, until you have completed your home purchase. If in doubt, consult your loan officer.
THE PERFECT HOME FOR YOU
Types of properties
- Single Family - If you like privacy and independence, buying a single-family residence might be the right choice for you. Your decision will be if you purchase an existing home or new construction. If you buy a newly built home, be sure to figure in the cost of upgrades and landscaping, which aren't usually included in the base price. A fixer-upper, on the other hand, may allow you to purchase more home for your money. Your house will quickly increase in value as you put work into it - as long as you're willing to invest the time and money it requires doing the job right.
- Attached–Single Family - This style affords you the benefits of a Single Family home, on normally a smaller lot, and it shares a portion of a wall with the neighbor next door. They are normally a lower price than a single family home.
- Condominiums - A condominium is halfway between an apartment and a house. You still own the building and the property, but you pay maintenance fees every month that pay for cutting the grass, trimming the hedges, painting the shutters, etc. You're still responsible for interior repairs and maintenance. Be sure to read the homeowners agreement before you decide to buy a condominium. This document dictates what is and isn’t allowed on the property and can include anything from how many and what types of vehicles can be parked in your driveway to how many pets you can own.
HOME SIZE MATTERS
- Drawbacks to a small house are obvious - not enough space.
- Drawbacks to a large home as well. Upkeep is considerably more work with a large home.
- The spaciousness that once brought you such happiness may lead to the frustration of never-ending cleaning and maintenance.
- Consider how much space you need how many rooms you need and how much furniture you want to have.
- Limit your home size to meet these requirements unless you're willing to put in a lot of time or hire maintenance and cleaning professionals.
NEIGHBORHOOD
- Urban, suburban, rural, young, old, high-traffic, low-traffic. You have many different options when it comes to choosing a neighborhood - too many to cover here. But here are some neighborhood variables to think about.
- How long are you willing to commute? This will give you a geographical boundary to look within.
- School System- If so; investigate the school system that your children will be attending carefully. See what learning opportunities are available to them. Even if you don't have kids or your children attend private school, the quality of the schools in your community will have an impact on the resale value of your home.
- Do you like high-energy environments or peace and quiet? When some people go home, they want to leave the world behind and relax in the peace and quiet of their personal retreat. Others would be bored to death by that environment and need more interaction and energy.
- What aspects of a community are important to you? Envision the perfect neighborhood in your head. Ask yourself what makes it perfect? Then seek out that neighborhood.
- When you're looking at homes, try to get a feel for the neighborhood to see if it's right for you. Talk to the neighbors and ask them what it's like. Be nosy. After all, you might live there for quite some time.
REAL ESTATE LICENSEES – REPRESENTATION IN ALASKA
- Seller’s Representation - Someone selling a home usually does so through a real estate licensee. When the seller contracts with the licensee, from that point on, the real estate licensee works for them. The real estate licensee is obligated to do whatever they can to get the best deal for their clients (the sellers). You are not their client. When they show you a home, they are obligated to tell the seller anything you say. So if you tell the agent, "I'm going to offer $90,000 for this home but I'm willing to pay $100, 000," the seller will soon know that you're willing to pay $100,000.
- Buyers Representation - You can hire your own real estate agent to help you through the home buying process. Since you engaged them, they are obligated to work for you, to get the best deal on a home for you. A buyer’s representative may ask you to sign a contract for services. The buyer’s representative normally attempts to be paid through the transaction, but in certain instances the buyer will have to pay a commission.
- Please see the following web pages for the required state disclosures:
YOU FOUND THE HOUSE - HOW THE HOME BECOMES YOURS
- The contract - Once you've found a home, made an offer and the seller has accepted your offer, the seller's agent draws up a contract specifying the terms and a closing date. When you sign this contract, you have officially agreed to purchase the home. Have a real estate attorney, or the real estate agent representing you, look over your contract. There are many small details that could make the difference between a good deal and a bad deal. An experienced professional can help ensure you're getting a good deal.
- Good faith deposit - When you make an offer on a house, you'll have to put down a good-faith deposit. This is to discourage you from putting a bid in on a lot of different houses with the intention of buying only one. This good faith deposit is usually several thousand dollars. If the deal falls through, you will get this money back unless you failed to perform as you contracted. If the deal goes through, the deposit goes towards your down payment and your share of closing costs.
- Contingencies - The contract almost always specifies contingencies. That means the contract is only valid if certain requirements are met. So, for example, if your financing doesn't come through, you still aren't required to purchase the home. Contingencies also cover home inspection (defined later), termite inspection, title search and several other possibilities that would nullify the deal.
- Inspection - Don't skip the home inspection. It is one of the most important parts of the home buying process. There are many big problems with a home that can't be detected with an untrained eye. A home inspector will go through the entire home to make sure there are no problems, which will either affect the value of the home or cause major problems in the future. If the home inspector finds any major problems not disclosed before you signed the sales contract, you can use the inspection contingency to walk away from the deal, or to renegotiate the price.
REQUIREMENTS FOR CLOSING
Before you can close on a house, you need the following:
- Title Search - This ensures the seller is clearly the owner of the house and that there are no liens against it.
- Title Insurance - If there is a problem with ownership, including fraud and forgery, the costs of dealing with those problems will be covered.
- Survey - In some locales a surveyor will be employed to make sure that the dimensions of the lot are accurate.
- Homeowner's Insurance - Since the home is the collateral for the loan, a lender will not give you a loan unless you have fire and casualty insurance. If you carry auto insurance, ask that agent for rates on home insurance. Insurance companies often give you better rates if you have more than one type of policy with them.
- Closing costs- Will be shared between the buyer and seller and will be negociated at the time of the contract.
BUYERS REMORSE - DID YOU MAKE A HUGE MISTAKE?
When you were in hot pursuit of the "American Dream" you were excited about the future and owning your own home -- researching neighborhoods, searching MLS sites on the internet, viewing homebuyer's magazines full of appealing homes that were just "minutes from the beach" with "fantastic views" and "cozy family rooms."
Next the really good stuff - looking at houses. Full of imagination and optimism for the future, you wandered about each home envisioning a happy and contented life for you and your family. The first house might have been "too big," and another was "too small," but finally you found one that was "just right."
So you made an offer and waited anxiously and excitedly for the counter-offer. Finally, you and the seller agreed on terms and you bought yourself a brand new home!
Congratulations! Break out the champagne and celebrate!
However...Later that night or perhaps the next day, you started worrying.
Did you make the right decision? Can you afford it? Is it the right time? Should you have waited? What if you lose your job? What if this happens? What if that happens? Anxiety and stress set in. Sleep may be hours in coming. This is a normal reaction to buying a home. It is called "buyer's remorse."
This is what you do...
Take out a pen and paper right now and draw a line down the center of the paper. Calmly and logically, think of all possible advantages to buying a home and write them down on one side of the page. Afterwards, you should list all the disadvantages on the other side of the paper.
This process is supposedly how Ben Franklin used to weigh tough decisions.
After you get done writing your lists, you may think back on your anxiety and think you were being silly. After all, buying a home is obviously a good decision. Your list proves it. But your reaction was normal and shared by many. You see, buying a home is not entirely a rational process. It is an emotional process, too.
You will not be totally stress-free, but it will help.
FORMS FOR BUYERS
Representation:
http://www.commerce.state.ak.us/occ/pub/rec4145.pdf
Waiver of Representation:
http://www.dced.state.ak.us/occ/pub/rec4212.pdf
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Ruth Blackwell, Associate Broker
9040 Glacier Highway, Juneau, Alaska 99801
Office 907-789-3888; Fax 907-789-7038; Cell 907-321-0615
E-mail: ruth@aukelake.com
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