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Buyer's Resources
Buying a home is the largest purchase most people will ever make. Homeownership has great benefits.
Are you ready for homeownership? Look at your current situation and determine if:
· You have a continuing and reliable source of income prior to applying for the loan.
· You have a credit history that shows you're ready for homeownership.
· Your total debt is manageable and you can afford to take on the costs associated with homeownership.
· You have money saved for a down payment and closing costs.
Once you fully understand your current situation, it's important to look at the pros and cons of homeownership to make the best decision for you and your family.
Benefits of Home Ownership
Homeownership has many advantages - both financial and personal. But buying a home is an important decision. Look at the benefits and the differences between homeownership and renting to better understand if owning a home is right for you.
What are the benefits of homeownership? Tax savings.
You may earn significant tax savings because you can deduct mortgage interest and property taxes from your federal income tax and many states' income tax if you itemize your deductions. · A more stable monthly housing expense.
Your monthly housing loan or mortgage expense can remain the same for the life of your mortgage, depending on the type of loan you choose. · Equity.
You may build equity in your home over the life of your loan, which allows you to plan for future goals like your child's education or your retirement. · Homeowners often have more freedom in decorating, landscaping, etc.
· There are higher costs associated with buying and selling a home.
· Homeowners have a financial investment and may build equity in their home.
How Much Can You Afford?
The actual number will vary based on factors such as your debt and credit history.
Mortgage lenders typically use the housing expense and debt-to-income ratios to more accurately determine how much you can afford to spend on your mortgage. To get a quick idea of what you can afford to spend, click here to get prequalified
Housing Expense Ratio
Mortgage lenders recommend that your monthly mortgage payment should be less than or equal to a quarter of your monthly gross income. This percentage can change based on the type of mortgage you choose and sometimes the area in which you're looking to buy.
Debt-to-Income Ratio
You need to factor your other debts into determining an affordable monthly mortgage payment. Mortgage lenders look at whether your total debt is larger than 40% of your monthly gross income. Remember, debt is not just credit cards and student loans. It can also include alimony, child support, car loans, and housing expenses. A mortgage lender, a housing counselor, or consumer credit counselor can help you better understand these guidelines. I can help you organize your financial picture by creating a budget. Don't forget that you also have to save for the down payment, closing costs, inspections costs, moving, and other related expenses.
Myths About Homeownership
Lenders evaluate mortgage applications a lot differently today than they did even 10 years ago. And even more has changed in the last 20 years. What used to close the door to homeownership may not be a factor today.
Here are some common homeownership myths:
Myth: You need great credit to become a homeowner.
Fact: You may still be able to buy a home with less-than-perfect credit. And remember, you can improve your credit over time.
Myth: You need to put 20% down to buy a home.
Fact: There are many types of mortgage products and programs that allows a 3% down or low and no down payments. But remember to factor in other costs such as closing costs, property taxes, moving expenses, and repairs.
Myth: You can't buy a home in the U.S. if you're not a citizen.
Fact: If you're a legal resident, you can purchase a home in the U.S.
Myth: If you don't have a bank account or credit cards, you can't qualify for a mortgage
Fact: Having a bank account is always a good idea and helps you establish credit. However, lenders can approve you for a mortgage even if you don't have a bank account or credit cards. You'll likely need to keep records showing a history of payments you've made for items such as rent, utilities, and car payments.
Myth: Lenders share your personal financial information with other companies.
Fact: By law, banks and other financial institutions are restricted in their uses and disclosures of information about you. In some situations, you may choose to restrict the disclosure of your information if you don't want it to be shared.
Myth: If you're late on your monthly mortgage payments, you'll lose your house.
Fact: If you have a financial hardship, like the death of your spouse or a medical emergency and fall behind, it's possible to keep your home and get back on track if you contact your lender early.
Myth: You can't get a mortgage if you've changed jobs several times in the last few years.
Fact: Not true. You can change jobs several times and still get a loan to buy a home. Lenders understand that people change jobs. The important thing is to show that you've had a stable income.
Top Ten Reasons to Purchase a Home If you are considering buying a new home is a wise and sound decision. Here’s why buying a home is a good idea. If you have any questions please contact me.
1. Tax savings – the interest paid on mortgages is tax deductible, so buying a home can actually save you quite a bit in income tax. New buyers with recent mortgages typically enjoy the most savings.
2. Historically low interest rates – record-setting interest rate lows make mortgages even more affordable. With lower interest rates, you will reduce the total cost of your home and be able to pay off your mortgage sooner.
3. Housing prices rise over time – as mentioned before, home prices have tended to rise 3-6% per year for the last 20 years. This trend is long-term and will probably continue. With this kind of return on investment, buying a home is one of the best long-term financial decisions you can make. Think of a home as one of the safest, surest investments out there.
4. Home ownership provides stability & security – it’s no secret that a home gives you roots—a sense of permanency and establishment. You no longer have to worry about nuisance landlords, rent increases, renewing your lease, obnoxious tenants, or any of the other headaches that renters face.
5. Give yourself a voice in the community – when it comes to policymakers, homeowners carry infinitely more clout than renters. You will have a more prominent voice in development issues, traffic changes, school proposals, etc. Policymakers tend to view homeowners as more established than transient renters and thus take them more seriously.
6. Decorate or renovate to your heart’s content – one of the biggest limitations renters face is the inability to redecorate, repaint, or renovate their rentals as they wish. If you own your home, you can change wall colors, put in new carpet, or even add another bedroom if you want. You have much more flexibility. Best of all, you will be adding to the resale value of your home by investing in upgrades.
7. You be working toward ownership rather than padding your landlord’s pockets – renting can be frustrating because you pay a lot of money each month, but have absolutely nothing to show for it when your lease is up. Renting is much more expensive than the cost of rent—you also have to account for the opportunity cost of the equity you could’ve built in a home in that time.
8. Become a part of a community – as a homeowner, you can get to know your neighbors, send your kids to the same schools, have block parties, and enjoy all the other perks that come with living in a neighborhood. Renters tend to live more isolated.
9. Option of using your home equity – with home equity loans, you can capitalize on the equity you’ve built in your home and use it for cash for other projects, such as education costs, renovations, etc.
10. Have a backyard – you will have a nice little place of your own that you can landscape yourself, plant a garden, BBQ on, or even put in a swimming pool. Renters can’t do any of these things.
Lease option sales were popular financing instruments in the late 1970s and early 1980s. They were primarily used as a way to circumvent alienation clauses in mortgages. Proponents claimed the sale was not really a sale because it was a lease; however, courts argued otherwise. Today, options to purchase, lease options and lease purchase agreements are three different financing documents. The variances are state specific and not all states have identical laws. Before entering into an agreement with a seller, buyers should obtain the advice of a real estate lawyer. The information below is an overview and is not meant to be construed as legal advice.
Basics of an Option
· Buyer pays the seller option money for the right to later purchase the property.
· Buyer and seller may agree to a purchase price now
· Buyer may agree to pay market value at the time the option is exercised. ·
· Buyers want to lock in the future purchase price upon inception of the option.
· The term of the option agreement is negotiable, but is generally from one year to three years.
· Option money is rarely refundable.
· Nobody else can buy the property during the option period.
· If the buyer does not exercise the option and purchase the property, the option expires.
· The buyer is not obligated to buy the property.
Basics of a Lease Option
· Buyer pays the seller option money for the right to later purchase the property.
· Buyer and seller may agree to a purchase price now
· Buyer may agree to pay market value at the time the option is exercised.
· Buyers want to lock in the future purchase price upon inception of the lease option.
· During the term, the buyer agrees to lease the property from the seller for a predetermined rental amount.
· The term of the agreement is negotiable, but the common length is generally from one year to three years.
· The option money generally does not apply toward the down payment.
· A portion of the monthly rental payment typically applies toward the purchase price.
· Option money is rarely refundable.
· Nobody else can buy the property during the lease option period.
· Buyer does not exercise the option and purchase the property, the option expires.
· The buyer is not obligated to buy the property.
Basics of a Lease Purchase
· Buyer pays the seller option money for the right to later purchase the property.
· Buyer and seller agree on a purchase price, often at or a bit higher than market value.
· During the term, the buyer agrees to lease the property from the seller for a predetermined rental amount.
· The term of the lease is negotiable, but the common length is generally from one year to three years.
· Buyer can at anytime applies for bank financing and pays the seller in full.
· The option money generally does not apply toward the down payment.
· A portion of the monthly lease payment typically applies toward the purchase price.
· Option money is nonrefundable.
· Nobody else can buy the property unless the buyer defaults.
· Buyers are often responsible for maintaining the property and paying all expenses associated with its upkeep
· The buyer is obligated to buy the property.
Doing a Lease Option / Lease Purchase
Hire a real estate lawyer to draw the documents and explain your rights, including those of possession and default consequences. The property might be encumbered by underlying loans that contain alienation clauses, giving the lender the right to accelerate the loans upon sale.
Sometimes sellers give the option money to their real estate agent as full payment of commission. Agents are not always involved in the exercise of lease options or fulfillment of lease purchase agreements and, even if you have retained real estate agent representation, you still need a real estate lawyer. Agents are not lawyers and cannot give legal advice.
In the event of a lease purchase, obtain all the disclosures and do your due diligence just like you would on a regular sale. This means:
· Get a home inspection.
· Examine the title policy.
· Obtain an appraisal.
· Read seller disclosures.
· Consider obtaining pest inspections, a roof certification, home warranty plan and hiring other qualified inspectors.
Lease Purchase Benefits for Sellers and Buyers
Lease purchase agreements are commonly offered by sellers of hard-to-sell properties. Think about it, if the property was easy to sell, the seller would sell it to a conventional buyer who would pay the seller cash.
· Sellers generally get market value at today's prices and relief from paying a mortgage on a vacant property.
· Although the lease payments may exceed market rent, the buyer is building a down payment
· Buyers are banking that the property will appreciate beyond the agreed upon purchase price.
· Buyers generally make a small down payment, with little or no qualifying
· Making a lease purchase an attractive way to ease into the benefits of home ownership.
· Part of the lease payment is credited toward the purchase price at the end of the lease option agreement.
· If the buyer defaults, sellers do not refund any portion of the lease payments nor the option money
· If the buyer defaults, sellers may retain the right to sue for specific performance.
For more information, contact a real estate lawyer.
In a lease agreement, there are various provisions and agreements between the lessor and lessee that set out the rights and obligations of each. One of these might be an option for the lessee to renew the lease at the end of the period. The tenant would have the right, upon giving the proper notice, to renew the lease for another period.
Another possible real estate option that a tenant or lessee might have is the lease/purchase option. This option would specify that the tenant has the right to purchase the property at a specified price during the term of the lease. In some of these arrangements, the lessor or landlord may also apply a portion of rental payments to the purchase price or down payment of the property.
Put your fears aside. Just because you have no credit, bad credit, filed bankruptcy or gone through a foreclosure does not mean you cannot buy a home. You most certainly can buy a home with bad credit. But you're going to pay more than a borrower who has sparkling credit.
The Waiting Period After Foreclosure / Bankruptcy (we can help with our no credit program)
· The period between bankruptcy filings is seven years, but the ding to your credit report stays for 10 years.
· For better rates with a conforming loan, the wait is four years after filing bankruptcy.
· FHA guidelines are two years after a foreclosure, which means you could qualify for as little as 3.5% down.
· Hard-money lenders will often make loans six months after filing bankruptcy or a foreclosure, but will a require 20 to 35% down payment. The interest rate will be very high and the loan terms are not as favorable; many will contain prepayment penalties and be adjustable.
· Subprime lenders (not to be confused with hard-money lenders) are no longer making 100% financed loans.
How to Improve Your Qualification For a Conforming Loan
· Obtain a major credit card. It's easier to get than you would think after a bankruptcy, for three reasons:
1. A bankruptcy filing gives you a "fresh start."
2. The lender knows you have no debt.
3. You can't file bankruptcy again for another 7 years.
· Show steady employment on the job for one to two years.
· Earn a regular salary or wage (this does not apply to self-employment).
· Save a down payment of at least 10%.
· Avoid late payments and continue to pay your bills on time; do not fall behind.
How FICO Scores Affect Interest Rates
Differences among FICO scores and how that relates to the interest rate borrowers are charged. The following numbers are in comparison to the interest rate a borrower with a 600 FICO score would pay who did not file bankruptcy or lost a previous home to foreclosure. This scenario assumes the borrower with bad credit is putting down 10% of the purchase price in cash and met the seasoning requirements above.
· FICO Score of 600 to 640: + 1.625% over prevailing rate. This means if a borrower with good credit is paying 5.875%, your interest rate would be 7.5%.
A $200,000 amortized loan at 7.5% would give you a monthly payment of $1,398.
· FICO Score of 560 to 580: +2.875% over prevailing rate. This means if a borrower with good credit is paying 5.875%, your interest rate would be 8.75%.
A $200,000 amortized loan at 8.75% would give you a monthly payment of $1,573.
· FICO Score of 540 to 559: +3.425% over prevailing rate. This means if a borrower with good credit is paying 5.875%, your interest rate would be 9.3%.
A $200,000 amortized loan at 9.3% would give you a monthly payment of $1,653.
· FICO Score Under 540 to 500: +3.875% over prevailing rate. This means if a borrower with good credit is paying 5.875%, your interest rate would be 9.75%.
A $200,000 amortized loan at 9.75% would give you a monthly payment of $1,718.
· FICO Score Under 500: +6.25% over prevailing rate. This means if a borrower with good credit is paying 5.875%, your interest rate would be 12%. With a FICO of less than 500, you will not qualify for a 90% loan, but you may qualify for a 65% loan, therefore, you need to increase your down payment from 10% to 35%.
A $200,000 amortized loan at 12% would give you a monthly payment of $2,057.
Comparing Identical FICOs Against Borrowers With No Foreclosure or Bankruptcy
A borrower without a bankruptcy or foreclosure with a 600 FICO would receive an interest rate of 5.875% and pay a monthly payment of $1183 on a $200,000 amortized loan. You can see that filing bankruptcy or having a foreclosure on your record, even with a FICO score of 600, results in an increase in a mortgage payment of $215 over that of a borrower without a bankruptcy or foreclosure. However, that difference in payment will let you buy a home.
Alternative to Bank-Financing
Borrowers who are not satisfied with the rate offered by a conforming lender might want to look at buying a home with seller financing. Land contracts offer a viable alternative. Typically, seller financing offers:
· No qualifying.
· Lower interest rates.
· Flexible terms
· Flexible down payments.
· Fast closing.
You will want to check with your lender every year or so to find out if you qualify for a refinance at a lower rate.
This is for Information Purposes Only.
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