Objective 2.03Analyze financial and legal

aspects of home ownership

So you want to buy a house…

• In order to buy a home most people will need to borrow money. This is called a mortgagemortgage• A mortgage is a contract outlining

the terms of a loan between the lender and the borrower.

Fixed Rate Mortgages(interest rate and monthly payment are constant)

1.1. Conventional: Conventional: borrower pays a fixed interest rate for the length of the loan

2.2. FHA-insured: FHA-insured: guarantees mortgages made by the bank to people with low-medium credit– FHA = Federal Housing Administration

3.3. VA loan: VA loan: buyers who serve or have served in the military may qualify for a loan guaranteed by the Veterans Administration

4.4. Terms of LoansTerms of Loans: : loans are repaid monthly over a term of 15-30 years.

Estimating What You Can Afford

• Multiply two-and-one-half times two-and-one-half times your annual gross income gross income (income before deductions)–Gross income X 2.5 = price of house

you can afford• Buyers must also have a down payment 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 Loan1.1. Housing to Income RatioHousing 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 2.2. Debt to Income Ratio: 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 repay3.3. BOTHBOTH ratios must be met to qualify for a loan!

Stop hereStop here

The Purchasing Process

1.1. Agreement of sale:Agreement of sale:– Also called a purchase agreement,

sales agreement, or contract of purchase

– Legal agreement between the seller and the buyer

– States all the conditions of the sale.

2.2. Earnest Money: Earnest Money: – MoneyMoney a potential buyer pays to

show that they are serious about buying a home

– Money is held and applied to the cost of the house or refunded if the buyer cannot get a loan.

3.3. Abstract of title:Abstract of title:– Also called a title searchtitle search– A search of public records to make

sure the seller is the true owner of the house

– Makes sure there are no debts on the house

4.4. Survey:Survey:– Makes sure property lines are

accurate.

5.5. Inspections:Inspections:–General home inspection General home inspection (roof,

heating and cooling systems, structural problems, safety issues)–Termite inspectionTermite inspection

6.6. Secure a mortgageSecure a mortgage–Now, most buyers will become Now, most buyers will become pre-

approved for a mortgage. for a mortgage.

7.7. Closing:Closing:– Closing is when the buyer takes

ownership of the propertyownership of the property– It involves the seller, the buyer,

lawyers, and real estate agents– Closing costs Closing costs are paid. This is cash

paid by the buyer to cover the legal and financial costs of purchasing a home.

Closing costs Closing costs can include:– Origination feesOrigination fees: fee paid to the lender

for processing the loan; usually 1% of mortgage

– Appraisal fee: Appraisal fee: fee paid for determining the value of the property

– Other fees Other fees for lawyers, real estate agents, etc. Some of the money will be held in escrowescrow - money held in trust by a third party until a specified time - usually for property taxes and insurance.

Advantages of Owning a Home• Sense of freedom and independence• Financial advantages:–Helps establish a good credit record in

order to qualify for future loans–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. equity. –Mary used her equity as a down payment on a new Mary used her equity as a down payment on a new

home.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.

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