Buying A Home
How Much House Can You Afford?
There are several ways to gauge how much you can afford to spend on a
house. But, before you go house-hunting, get pre-qualified for a mortgage
so you'll know in what price range you can shop. It is not unusual for
first-time buyers to be somewhat baffled about how to estimate what
mortgage payment they will be able to handle each month, plus how much
money they'll need for a down payment and closing costs.
That's why it
is a good idea to get pre-qualified through a lender before you even start
to look for a home. Pre-qualification lets a buyer know exactly how much a
lender is willing to loan them. With pre-qualification in hand, the buyer
can save a lot of time-and frustration.
Pre-qualification does not obligate buyers to take a loan from the lender,
nor should it involve any fees (until later, when they actually apply for
the loan). At the same time, you must understand that pre-qualification is
not pre-approval for a loan either which is a much more involved
formalized process that results in an actual letter of credit from a
lending institution for a specific loan. Depending on your unique
circumstances, you may wish to consider pre-approval as an option, but it
is not necessary-consult with your real estate professional to decide
what's right for you.
Real Estate for sale in Cincinnati.
The less
formal process of pre-qualifying on the other hand is a tremendous tool
for buyers to have when making an offer. Usually, pre-qualified buyers
have an edge when making a purchase offer because the seller knows that
the buyer is pre-qualified, and that there is at least one lender ready to
make it happen. In addition, it allows you the flexibility to choose the
mortgage that is best for you at the time of actual purchase-which is
sometimes months down the road. That can be important given the volatility
of interest rates. When a lender pre-qualifies, they are more concerned
about the buyer's paying ability than the price of the property.
For this
reason, lenders are interested in more than just a buyer's income. They
also want to know how much existing debt a buyer has, what their on-going
financial obligations happen to be, and what the buyer's monthly budget
looks like. Lenders use an established debt-to-income ratio, usually between .28 to 1
and .38 to 1, to calculate the amount of the loan they are willing to give
to a buyer. For instance, a lender who uses a .3 to 1 debt-to-income ratio
has determined that payments toward debt reduction-including existing debt
plus new debt associated with buying a home-cannot be more than 30% of
they buyer's gross monthly income.
An important
factor that may influence a lender to authorize a loan with a higher
debt-to-income ratio - (where debt payments take a higher percentage of a
buyer's income) - is a larger down payment. Buyers who put a larger
percentage of the purchase price down (5%, 10%, 15%, 20%, etc.) are
considered better "risks," because the theory is that the more a person
has actually invested in the purchase, the less likely they are to default
on the loan.
Buyers usually
discover that the pre-qualification process will produce a home purchase
price that is roughly 2 1/2 to 3 times their gross annual income. The 2
1/2 -to-3 guideline is only a general rule of thumb, however, and it
doesn't take a buyer's full financial situation into consideration. Since
the lender's calculations will also consider a buyer's actual debts and
ongoing expenses, the loan pre-qualification amount may be higher or
lower. Regardless of the price bracket a buyer targets, they should keep
pre-qualification in mind.
Real Estate for sale in Cincinnati.
How
much should you budget to own your own home?
Aside from the down payment, the three largest expenditures involved with
the purchase of a home are usually your monthly mortgage payment,
insurance and taxes. Obviously, the amount of your mortgage payment
depends upon your down payment, rate of interest and the price of the
property.
Take, for
example, a home that has a $200,000 mortgage. An 7% fixed mortgage for 30
years, will run approximately $1330 per month. What about taxes? The rate
will often times vary from city-to-city, but generally you might expect
your yearly tax bill to total around 1.25% of the purchase price. That
means, for a home with a market value of $250,000, yearly taxes might run
around $3125. A local real estate agent can help prospective homeowners
refine these figures. In addition, it is important to keep in mind that there are many
additional expenses incurred with home ownership, some of the most obvious
are utilities and trash collection. Smart homeowners should also budget
for one other item, maintenance and upkeep of the home. If possible, a
small amount should be set aside each month to pay for those "rainy day"
repairs such as painting, plumbing (hot water heaters, garbage disposals),
adding storm windows (to improve energy usage), insulation (in attics),
etc.
But home
ownership is not just a one way street-that is, aside from spending money
on repairs and maintenance, homeowners can profit from their property. The
most significant benefit is the tax deduction. It is no secret that among
the last real income tax deductions available to consumers today are the
interest paid on the home loan, and the property taxes. This can amount to
thousands of dollars in deductions each year. And, of course, the primary
benefit of home ownership is appreciation-equity that builds every month.
A home, aside from being a place that provides shelter, can be a
profitable investment, and the rising value of the property oftentimes
provides another "savings" account. So, when it comes to buying a new home, remember one thing ... the
purchase of a property requires budgeting and planning.
Real Estate for sale in Cincinnati.
How do
you go about finding a mortgage?
The commotion of house hunting is finally over. You found just the right
house, and your offer has been accepted. It was a great buy. Now, just one
more hurdle-getting a loan-and you're home free. Often, buyers are so
eager to get this "final detail" behind them, they rush through this
portion of the transaction, and end up with less-than-ideal terms.
Borrowers, however, have something lenders want-their business. This
positions them to negotiate the best possible price (cost of loan), terms
and service.
Let's look at
price, or the cost of the loan. The first thing to do is find out what the
current rates are, information readily available on the internet, in your
newspaper or from your real estate agent. When comparing rates, figure the
annual percentage rate (APR), which includes interest, extra fees and
costs amortized over the life of the loan. Also determine the number of
points, if any, that the lender will charge to make the loan.
(A point is
equal to one percent of the loan amount.)
Next, consider what loan options the lender offers. There are six or seven
basic types of loans, which vary in their duration. Check how rates are
calculated (fixed versus variable), and whether charges are fully
amortized over the life of the loan, or whether you'll have to pay points
up front and/or balloon payments at the end.
Is
there a prepayment penalty clause?
Which terms are best for you depends on such factors as what changes you
expect in your income and what you predict will happen in loan rates in
the years ahead. For example, if you only plan to reside in the home for a
year or two, starting with a lower Adjustable Rate Mortgage (ARM) might be
the best choice. If you have no plans to move, and feel that inflation
will rise rapidly, a fixed rate would obviously be better.
Finally, and
perhaps most importantly, consider speed and service. Buyers shouldn't
have to wait days for approval and weeks for closing just because the
lender is slow. Remember, qualified buyers are great prospects for lenders
- so give your business to the lender who demonstrates they not only want
it, they deserve it.
Real Estate for sale in Cincinnati.
How
difficult is it to qualify for a mortgage if you have a past credit
problem?
Credit problems can make it harder to qualify, but it's quite possible for
buyers with poor credit to obtain a home loan. Anyone who has had a financial problem-whether it was a matter of late
credit payment, delinquent taxes, or even a judgment that was filed-should
expect this data to be a factor when applying for a mortgage.
How critical a factor? Minor lapses will probably have little or no
effect. However, buyers with serious problems may still qualify for a
loan, but they may have to pay a higher rate of interest or provide a
larger down payment. There are three steps that a person with past credit
problems should take before applying for a loan.
First, request
a credit profile from one of three major credit reporting agencies. To get
copies of your credit report, start at: Credit Now - Credit Reports
Second, the buyer should optimize his or her credit profile by citing
prompt payment of rent, utilities, and other bills not reported on the
credit profiles.
Finally, the buyer should be prepared to provide comprehensive and candid
explanations for any late payments to the loan officer. This is important
because problems not reported by the buyer but discovered by the lender
will reflect unfavorable. Many lenders are understanding about one-time problems such as the loss of
a job, a medical emergency, etc.
Real Estate for sale in Cincinnati.
Buyers with
patterns of delinquent payments might want to consider adding six months
or a year of flawless credit to their track record before pursuing their
home-buying plans. So remember-if you are thinking about purchasing a
home, but are worried about your past financial record-don't give up.
There are solutions, lenders and agents who are in business to help.
What
are the five most common mistakes made by first-time buyers-and how can
you avoid them?
A good home-buying decision is one that fits your lifestyle and your
budget-a house you'll be able to resell when the time is right. Sound
simple? Not always.
Five common
mistakes frequently made by first-time buyers.
1. Looking outside your price range. To avoid
disappointment, contact a real estate agent who can help you pre-qualify
before you start looking for a home. The agent can also provide valuable
insight on taxes and other expenses associated with a home (utility bills,
etc.)
2. Buying on impulse. Buyers-especially first-timers-may
be impressed by the first two or three homes they view. Look at a good
selection. List the positives and negatives. Narrow the prospects to three
or four, and then return for a closer look. Evaluate more than just the
property. Look at the surrounding area and community amenities. Is this
what you-and your family-want and need?
3. Not planning ahead.
Think seriously about any personal
changes you are planning in the next five to seven years.
For instance, if you are planning on having children, consider how the
home will meet both your current and future needs. If a double-income is
necessary to qualify for financing-and make your payments-do your plans
foresee an income sufficient to continue making payments?
4. Failure to focus on location. Don't just focus on the
house, examine the neighborhood. Is the area safe, well maintained,
moderately quiet and close to work, stores, and schools?
Find out about zoning and what new construction is planned on any vacant
land in the immediate neighborhood.
Will the property be easy to market when you are prepared to sell it?
5. Failure to understand the home buying process. Once
you select a home, get involved. Find a real estate agent willing to spend
time with you, and don't hesitate to ask questions. Have them explain the
negotiation, financing and escrow processes and other elements involved in
the transaction.
Home-buying
involves knowing the price, and what's inside and around the
property. Consider all your options carefully. This may be the most
important financial transaction of your life.
Real Estate for sale in Cincinnati.
What's
the real difference between a new home and an old one?
While each offers its own style and charm, the difference usually boils
down to two things:
1. How the home fits into the buyer's lifestyle.
2. The condition of the property.
Homes that are 10 years old or less are generally better insulated - or
have dual-glazed windows or thermal panes - which translate into lower
heating and cooling bills. And, in today's rising energy cost environment,
these considerations are significant. Although there are some exceptions,
homes that have been built with all-electric systems, generally have
higher utility bills.
Homes that range between 15 and 20 years old may be in need of new water
pipes, especially if the old ones were galvanized and if a water softener
was used. Water softeners and galvanized pipe can be deadly and, after
15-20 years, re- plumbing is usually required. Have a plumber or general
contractor inspect the pipes. Needless to say, it can be expensive to
re-plumb an entire system. Check the built-in fixtures and appliances for
any signs of damage. Flush toilets, test all the water taps and the electrical sockets, open
and shut the windows, and try all the lights.
Real Estate for sale in Cincinnati.
A window that
will not open may be a sign of a more significant problem-for example, a
wall may have shifted, or worse yet, it could indicate a problem with the
foundation itself. It is also a good idea to ask the seller for copies of
past utility bills. Examine them for some insight into what you can expect
monthly gas and electric costs to be. Although newer homes may be free of
significant physical or structural problems, there are other things to
consider in making your decision.
Generally,
room size and yard size tend to be smaller in some newer homes. While, on
the other hand, they usually offer the benefit of the latest building and
design technology. Many new homes also have more windows and natural light
incorporated into their design plan, allowing for a more spacious feel and
efficient energy usage.
Should
a buyer get a professional inspection for the home they are buying?
Definitely. Hiring a professional home inspector can save a great deal of
grief for buyers. The one exception would be when the home is new and
carries a written warranty by the builder. Many buyers mistakenly believe
that the only reason to have a home inspection is to make sure that the
house they're buying doesn't have defects serious enough to warrant
backing out of the transaction. But there's more to it than that.
Certainly, an
inspection will usually reveal major problems that may even surprise the
seller. The obvious ones are corroded plumbing, antiquated and unsafe
electrical systems, or structural and foundation problems. And, the
discovery of such problems may cause the buyer to re- think his or her
offer. Although a competent inspector can uncover deal-crushing defects,
these problems are usually not commonplace. Typically, the seller will
already have told the buyer about anything major. More often, inspections
reveal less serious problems; problems that may not be serious but can be
aggravating.
For instance,
there could be a minor electrical defect, or inferior ventilation of a
heating system or fireplace. If so, the buyer is usually in the position
of having the purchase price reduced, or the defect corrected. More
important, it also prevents the minor problem from developing into a major
disaster a year or two down the road. There is, of course, the possibility that the home inspection will produce
another outcome: everything is fine. In this case, they buyer gains piece
of mind, confident about the major investment he or she is about to make.
That, too, is an enormous benefit for the cost of the inspection.
Real Estate for sale in Cincinnati.
Now,
how does a buyer find a home inspection?
By asking their real estate agent, friends, or lender. Inspectors are also
listed in the Yellow Pages under "Home Inspection Services." But, a word
of advice, don't hire a contractor. Contractors earn their living doing
repair and renovation work, so their recommendations aren't likely to be
as objective as those of a professional inspector.
Is
real estate a wise investment?
There are fewer investments that have shown a better return. However, the
key to investing wisely in real estate is understanding how the industry
differs from others.
For example,
when the defense industry dips, it usually shows a national decline and
the stock prices of defense-oriented firms drop across the board. The same
is true of most industries. They are impacted nationally. That is not the
case with real estate, which is actually an industry and investment driven
by local conditions. One community may suddenly lose a manufacturing
facility, and almost overnight the market is flooded with properties for
sale.
Obviously, the
key to successful real estate investing, like stocks and bonds, is to buy
low and sell high. But, how do you know when the "low" has been reached?
Or, for that matter, how can you judge when you property may be peaking in
value? Some investors rely partially on the media. They read the daily
newspaper, watch television and follow the trends. Although the media
provides a good deal of information, remember that by the time things are
printed or broadcast, the news may be old.
For instance,
you will find statistics frequently quoted in the media that have been
supplied by the National Association of REALTORS (NAR). But, NAR
statistics-like most- tell you where things have been, not where they are
going. So what can you do? First, check local economic indicators. Also, the
local chamber of commerce can frequently help. They usually have
information on which companies are moving in and out of an area.
Real Estate for sale in Cincinnati.
Logically, the
relocation of a firm into a community generally indicates that demand for
real estate in that marketplace will increase-while if firms are moving
out of the area, housing demand will often shrink. Aside from economic
indicators, check real estate trends and cycles. Talk to a real estate
agent. They can provide statistics on how quickly homes have sold, how
prices have fluctuated in the past six to 12 months, and projections of
future home sales. They can show you how today's market compares to last
year's. Are sales headed up? Down? The same? The answers will not only
help you determine what the market is like in your area, but they will
also be critically important in helping you determine when and where to
make your real estate investment.
Does a home
warranty protect a buyer in the event something goes wrong after they have
purchased a property?
Sometimes. That's because home warranties are often times misunderstood
and not every warranty provides the same protection. All warranty
companies are not equal, either.
Warranties, of
course, were designed to protect buyers from problems that emerged after
they moved into a dwelling. For example, if a major appliance breaks or
the roof leaks, the ideal warranty kicks in and pays for the repairs.
On the surface, this sounds simple and straight-forward. But, most of the
time it is not.
First, all
warranties differ. Aside form the obvious differences, the amount of
deductible required, they may also vary as what is covered and what is
not. For instance, with some warranties if the hot water heater works on
the day of closing, but suddenly does not work six months later, then it
may be covered. And, with other policies if the water heater was not in
good working condition when the home was purchased, and it breaks a week
or two later, there is no coverage. Warranties can be critically important when it comes to new construction,
too. Obviously, the reputation of the builder is an important
consideration. However, problems with new homes can be enormously
expensive if they are not covered by a warranty.
Real Estate for sale in Cincinnati.
There are two
types of defects when it comes to new homes - patent or latent. Patent are
those problems which can be seen. Cracked plaster, a fence that is off
level, etc. Latent problems develop later, and may not show up for five or
six months. Ground shifting, for example. Latent problems are usually more
expensive than patent problems.
Thus, the
warranty for a new home can be one of the most important documents
executed during the buying process.
Whether you're purchasing a new home or a resale, remember that warranties
definitely have a place when it comes to protection and peace or mind in
the real estate transaction, but make sure that you check them out
carefully.
Is a final
walk through, an inspection of the property by the buyer before they move
in -- really important? Yes, it is. The intent of a pre-closing inspection
is to give the buyer one last opportunity to verify that they are getting
all that was promised in the sales contract. Although buyers still have
legal recourse if they discover-even after closing-that the condition of
the home is not as it should be.
The best time
to identify problems is before closing, when the seller will be motivated
to correct any deficiencies in order to close the transaction. Typically,
a buyer takes possession of a property one to three months after signing
the sales agreement. But, a lot can happen before the actual move-in.
Appliances and fixtures can break down, and walls, carpets and doors can
be damaged during the seller's move-out. Sometimes the seller will simply
have forgotten that he or she had agreed to leave the refrigerator or
window coverings with the house. Whatever the reason, problems identified
before closing have the best chance of being remedied.
If possible,
schedule the inspection right before the closing, such as the day before.
Ask your real estate agent to attend the inspection with you. What should
you be inspecting? Using a copy of the sales contract as a checklist,
first make sure that all items that should be in place (appliances,
built-in furniture, window coverings, fixtures, etc.) are there.Test each appliance to make sure they work properly. Test all electrical
switches and the garage door opener, if there is one. Run the garbage
disposal and turn on every water faucet, checking under the sinks for
leaks. Flush the toilets. Inspect the floors, carpets, walls and doors for
recent damage. If you discover that something is damaged or missing, make
a note of it and inform your agent immediately.
In most cases,
the seller is usually able to take care of small problems immediately,
either by making a needed repair or offering compensation to handle it.
And, if there are major problems the seller can even sign a statement
acknowledging the deficiency and agree to correct it. Although pre-closing
inspections take time and may be inconvenient, they are important and well
worth the buyer's time.
Real Estate for sale in Cincinnati.
What
are "contingencies" and why are they important?
A "contingency," is an escape-clause that is added in-writing to a
contract which allows a buyer to back out of the transaction if certain
conditions aren't met. Some contingencies, often called `riders'-like
attorney approval of the contract, or the passing of a home inspection-are
obviously designed to protect buyers from a poorly written contract or a
defective home.
Other purchase
contingencies may hinge on the buyer's current living situation, or his or
her cash-flow. For example, when it comes to contingencies many first-time
buyers can be better prospects for a seller's home than move-up buyers.
Why? Because offers from homeowners usually are contingent upon the sale
of their present home. And, even if a move-up buyer has an offer for their
home in-hand, their buyer's offer may be contingent on another contingency
(or sale) and so on down the line. If one transaction in the chain falls
through, they all might. Cash offers can also be more attractive to
sellers.
Why? After
all, the seller will get their money at closing whether or not the buyer
has cash or takes out a loan. True, but cash offers don't require lender
approval, and loan approval is never a certainty and may delay or prevent
closing. (Incidentally, for this reason, buyers who get pre-qualified for
a loan have an edge over other buyers. A pre-qualified buyer is the same
as a cash buyer.)
Buyers
offering a larger-than-customary amount of "earnest money", (a deposit
that accompanies an offer) can be more appealing too. More money deposited
with the signed contract often demonstrates greater sincerity and
motivation to close the transaction.
Real Estate for sale in Cincinnati.
