Chapter Objectives Chapter 8. Housing 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 other housing related expenses. How high are the mortgage interest rates? Rates vary a lot over time. Effective rate (%) 15.00 10.00 5.00 0.00 Effective Interest Rate on Fixed-Rate Mortgage 1985-2004 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Year Mortgage interest rate also vary depending on 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? Housing Expense Test 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 How does debt affect me? - The debt repayment 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
So what s the bottom line? 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 How much housing can $242,585 buy? Depending on the location Median sale price of existing single family houses in 1 st 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 Buying Pluses Appreciation Tax Advantage Privacy Negatives Immobility Sales Commissions Maintenance Financial Risk Vs. Renting Pluses Mobility Low Maintenance Low Risk Negatives Landlord restrictions No equity buildup No tax advantage 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 on 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 Home Warranties New home: builder s warranty Resale: home buyer s warranty 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 of the loan the monthly payment may change over the term of 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 over the term of the loan Shared Appreciation Mortgage Lender shares in home s appreciated market value Comparing and getting a mortgage 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
The Closing Reading the fine print Prepayment penalty Escrow account Acceleration clause Due-on-sale clause 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.