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The key to successfully purchasing real estate and structuring a good purchase is your ability to know the fair market value (FMV). You must understand the asking price or list price is not the fair market value; they represent what the seller wants. These figures could have been pulled from the air or the Realtor may have suggested the price. There are four quick ways to determine FMV.
1. Comparables - Contact a Realtor and ask for sold comparables in a specific area or community. They can often provide you with several properties that have sold. This will give you a general idea of the FMV in the local area.
2. Tax Assessed Value – This is the value a county government says a property is worth. Most are below market value, you will find they are consistently at a rate of 85 - 90% of fair market value. I a lot of counties this can be done over the internet.
3. Courthouse Records - Visit the tax assessor’s office to simply research houses that have recently sold in that area. I a lot of counties this can also be done over the internet.
4. Appraisal- An estimate determined by a professional appraiser of what a property would sell for under normal market conditions. This approach cost money, $500.00 to $1000.00 in most cases, and how do you think the professional appraiser determines the value? Exactly, they use the three methods already mentioned.
The comparable method is the most basic and commonly used method to determine the value of a single-family house. Properties can be evaluated in a number of other ways, for investment property, most people evaluate the return on investment or profit margin.
The return on investment of a property is the profit in the property as it compares to the amount of cash you have invested; this is quoted as a percentage and is for a year. A 100% to 150% return on investment is not uncommon.
The formula looks like this: (Profit/Cash Investment)/Years=Return on Investment
Note: Years are expressed as a decimal, i.e. 18 months would be 1.5 years
Cash investment includes all cash; down payment, repairs, insurance, etc.
The profit margin of a property is the fair market value minus the purchase price and all cost of owning the property, including repairs; this is quoted as a percentage. A 30% to 40% profit margin is a fair deal with room for error.
The formula looks like this: (FMV-Cost)/FMV=Profit Margin
Remember, buying a house is a lot easier than owning or selling it. You have to do your homework, you have to be fair and honest in your evaluation, and if it does not look right, walk away.
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Any property you are considering purchasing should be inspected, you never know what's under the roof.
To get a feel for the property use some informal inspection techniques. To complete this exercise you will need some general knowledge, pen and paper, a clipboard, flashlight, marble and an inquiring approach.
1. Roof – Prior to entering the home stop outside and examine the roof. Look for traces the roof may be damaged (shingles curling up at the edges, dry rot, under curling, etc.). Five to ten years of life remaining on the roof is recommended and preferably less than 3 layers of shingles.
2. Ceiling – Once inside the property examine the ceiling with your flashlight. Look for stains, water damage, and fresh paint on the ceiling.
3. Cabinets – Check the cabinets and look under the sink.
4. Windows and Garage Door – Make sure all windows and the garage door open and shut properly.
5. Marble – Use a marble to test whether a property is level. You can put a marble on a flat floor surface or counter to substantiate the levelness of the property.
As a general rule, look in every corner and cabinet in the property. All offers must have an inspection clause. For example “Subject to home inspection and approval.” There are a number of reasons you should conduct an inspection. Always specify a time frame for the inspections to be completed (i.e. “10 business days from acceptance of seller”). If anything seems unusual or concerning, get professional help, it will be money well spent in the long run.
Most home buyers don’t know what to look for when evaluating a property for problems and concerns. A good cleanup and paint job can hide a lot of damage. Possible termite damage, water leakage and infestations could be hidden under the roof. Plumbing can be old and outdated. Electrical systems may be fire hazards. How do you know? By learning how to inspect a property and getting professional help when necessary you can avoid many of the pitfalls other have and will fall into.
If you find that “Dream House” and it is in need of some repairs, estimate the cost of repairs before you make an offer, at the very least you want to take that amount off of your offer. You may want to pass on the property if the repairs are too expensive or extensive. A badly damaged property can be difficult to work with and should probably be left to the professionals. On the other hand, if the damage is small you should be able to negotiate a lower purchase price for the property.
Inspecting a property is not rocket science once you know how too!
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If you are looking for a bargain on your house purchase, look to foreclosures. If a property owner faces financial difficulty and fails to pay the mortgage payments on their property, the mortgage is considered to be in default. A lender will then take action to acquire their unpaid mortgage debt through the process of foreclosure. There are three phases of foreclosure; pre-foreclosure, foreclosure sale and REO (Real Estate Owned).
When a property owner is behind on their payments to a lender they will be notified that they are in default and of the lenders intention to foreclose. Depending on the state the property is located in, the duration of time between its being in default and actually going to auction, can differ from 3month to 1year. During this period the property is considered to be in pre-foreclosure. At any point during this period the home owner can avoid foreclosure by paying off their debt, in some cases they must only catch up their back payments, in other situations they must satisfy the entire debt. You can buy the property from the owner, they avoid foreclosure, possibly even receive some cash, and you receive a great discount.
The larger the gap between the default amount and the Fair Market Value of the property, the greater your potential discount. It is important to inspect the property for potential damage. Home owners that think they are going to loss a property tend not to take the best care of the property. A title search is also very important, you need to check for any other unpaid bill which could become liens, other financial institution, unpaid taxes, condo fees, etc. could all becomes liens against your new property and consequently you.
When a property is foreclosed on, it is sold at a foreclosure auction so the lender can recover the money they originally loaned the owner to buy the house. The court or county sheriff with sell the property at an auction to the highest bidder, the proceeds will then be used to pay off the debt. In most if not all cases the lender makes the first or minimum bit, which is the amount they are owed. If no one bids over the opening bid, the lender gets the property; however, lenders are not in real estate business. For banks, REO (Real Estate Owned) is not an asset, it is a liability, and they have to get rid of it because it is a negative number on their books.
Lenders may only recover the amount of the mortgage owed, taxes, interests and penalties and court costs at the foreclosure sale. By law, a lender is not allowed to profit from a foreclosure sale, they only get the final judgment amount, if the sale brings more than the lender is owed the remaining amount goes to property owner.
Banks, public notice, and the local county clerk's office are all viable sources to find owners in pre-foreclosure.
Lease purchase or lease with an option to buy is a contract between buyer and seller which is the financing for purchasing a home. Buyer leases the property for a certain period of time then agrees to purchase the home at the end of the lease at a set price. The buyer puts down an option deposit which will later become the down payment on the purchase price. The buyer pays monthly payments like rent, a portion of which is also applied toward the purchase price. When the lease expires, the buyer has option to buy the property.
If the buyer decides not to buy the property or doesn't pay the monthly payments, the seller keeps all the money received and the lease option agreement is terminated. If the buyer pays the monthly payments on time and decides to purchase the home at the end of the lease, the buyer purchases home with some equity already in it. The set price which the buyer and seller originally agreed on, minus the option deposit and the portion of the monthly payments which were applied to the principle, paid during lease period. This is truly win-win situation of real estate deals for both buyer and seller.
The buyer’s benefits are:
• Little money up front: An option deposits much less than a mortgage down payment.
• Equity growth: The portion of the monthly payment being applied to the principle is usually much greater than with a mortgage. Since the price was set at the beginning of the lease, any appreciation belongs to the buyer.
• Little or no down payment: Buyer has equity in the home so often there is no or little down payment required to obtain a mortgage.
• Assign of lease: Buyer can assign the lease to third party and make profit.
• Control of home: Buyer has legal control of home during lease period.
• Flexible qualification for Credit: Qualification is more flexible since you are only dealing with the seller.
• Buyers don't pay property taxes or insurance during the lease period.
• Minimal Maintenance: Maintenance problems are delegated to the seller.
The seller’s benefits are:
• Set selling price: The price of home is locked; Seller can actually sell for higher price than usual since he is offering a form of financing.
• Little risk: When the buyer fails to pay monthly payments or decides not to buy the house, the seller keeps all of the money received.
• Cash flow: Seller can charge a little higher monthly payment than rent since they are providing financing and the portion of the payment goes to the principal of the loan. Tax advantage:
• Tax benefit can go to the seller.
• No realty commission: Since there is no real estate agent or broker involved, seller saves real estate commissions.
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"Don't buy that car right now, dear"
If you're in the market for a mortgage loan, you want to keep one thing high and one thing low. You want to make sure that your credit score is high and your debt-to-income ratio is low. If you are seeking a loan, most loans officer will do a credit check on you. Credit scores are reported by each of the three major credit bureaus: TRW, Equifax, and Trans Union. On a scale between 365 and 840, a score of 680 will put a smile on the face of your loans officer, and greatly assist you in your quest for a mortgage loan. On the other side of the coin, the lending company will also want to ensure that your debt-to-income ratio is low. This is the ratio of how much you owe compared to how much you make.
Sometimes when people are hunting for a house, they wish to purchase other large ticket items like furniture, appliances or a CAR. Now, all of these things are great, but there is a time and place for everything. The wrong time to make these purchases is when you're applying for a mortgage loan. Why? Because originally the borrower would have qualified in the price range they were looking for, except that the new car payment has raised their debt-to-income ratio, thus lowering their maximum purchase price.
Before you go out and fall in love with that perfect house, make sure you can afford it. There is nothing worse than finding the perfect house, and then finding out you don’t qualify for a big enough mortgage to buy the house of your dreams.
Here are the questions you should have answers to before you go house hunting.
Should I buy or rent?
Compare monthly rental versus monthly mortgage payments;
Compare the cost of renting to the after-tax cost of owning;
How much house can I afford?
Use a Home Affordability calculator to determine your price range, and the size of mortgage you need, before shopping for a home. This important step will help you avoid unnecessary frustration looking at homes that are not in your price range.
Why should I get a pre-approved mortgage?
There are 2 main reasons for getting pre-approved. You will know exactly how much you can afford. You can negotiate the best price because the seller knows you are serious and you have the resources in hand to make the deal.
Other things to consider...
The resale factor is a big issue when looking for a home. When looking for the perfect home, think about the resale factor. In some areas, a swimming pool actually detracts from a home's value and makes the home harder to sell. In neighborhoods with two-car, attached garages, a single-car or detached garage may impact the homes future value. Your Realtor can point out features that hurt, as well as those that help, resale value.
Consider taxes. When you buy a home, mortgage interest and property taxes are generally deductible from income taxes. This means while monthly housing costs may be larger when you own than when you rent, what you save in taxes can make up some if not all of the difference.
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There are many reasons why you need a real estate appraisal.
Reduce property taxes, probate, estate planning, divorce settlements are some. The most common one is to obtain a mortgage. Most lenders are required by federal and state laws and current banking regulations to obtain an appraisal for most loans secured by real estate. As of Jan. 1, 1993, all appraisals made for mortgage loans from federally insured lenders and other federally related transactions must be made by a licensed or certified appraiser.
What is an Appraisal?
An appraisal is an objective supported opinion of value of an adequately described piece of property made by an appraiser who has sufficient knowledge, training and experience to accurately estimate its value. In this detailed and time consuming report, appraisers use comparable sales together with information about the property being appraised, its neighborhood and community along with the local and national economy, to support the appraised value.
Look Objectively, not Subjectively.
The most important thing you can do when previewing is to look at the house as if empty: four walls, floors and a roof.
Don't let the current owners' furniture and decor influence you.
Important Tip!
If you are buying a house with the owner carrying the paper (loan), it is well worth the cost to hire an appraiser to make sure you don't pay more than it is worth.
For your protection many real estate agents will write in a purchase contract: this contract is contingent upon the property appraising for the sales price.
How is Value Established?
The value of a house is based upon recent sales of the similar neighboring homes in the market as well as rentals and listing data.
Ideally, appraisers want to use sales of properties of the same size, age, room count, condition and with similar amenities and external influences. This rarely happens though, so adjustments have to be made, based on what people will pay extra for.
Examples: extra square footage, bedrooms, fireplace, upgrading, parking facilities, swimming pool, lot size, location and so on. To help get a better picture, this information is entered on a form, a value for differences is established and comparisons are made to the subject property.
A minimum of three verified closed sales with photos are required to establish a value.
Houses Appraise for More When:
- Well maintained inside and out.
- Located in a good school district.
- Additions are done with the proper building permits.
- Additions conform with and fit well into the existing house.
- Properties throughout the neighborhood are well maintained.
- Not over improved or the largest house on the block.
- Style of the house conforms with those in the neighborhood.
- Zoning changes are not expected or there is not a mixed use.
Remember: Location, location, location.
You can change everything about a house except it's location.
What is Poor Location?
- Located on a feeder street.
- Under an airport flight path.
- In or near a gang territory.
- Center of night life activities.
- In a rundown block or neighborhood.
- Next to a school or school yard playground.
- Next to apartments or commercial property.
- In close proximity to a freeway, expressway or railroad.
- Next to a gas station, near a municipal garbage or toxic waste dump.
- Odors from factories, farms and processing plants are routinely noticed.
- The city is affected by the closing of a major employer.
Think about Selling - When You are Buying.
Location is a big factor in a home's appraised value. This is most notably felt at the time you sell or refinance. What seems like a bargain when you buy might turn into a real headache when you try to sell. Drive around the neighborhood and note any adverse conditions.
You may think you can live with something adverse for the price, but when it's time to sell you might find buyers won't.
Important Tip!
Adding onto your house = Always obtain a building permit.
A 600 square foot addition built without a permit is given no value on an appraisal. When it is time to sell or refinance, the frustrations of the building permit process will be worth it.
Always save copies of the final permit sign offs and keep with your house papers.
Buying a House with an Addition?
Verify that it was built with a permit prior to closing the sale.
Don't just accept the sellers word. Get copies of the permits before final sign off.
Should you want to refinance or sell at a later date, and the appraiser cannot verify the addition being permitted, no value should be given.
The result: no new loan or worse . . . no sale.
Important Tip!
A one bedroom house or condominium doesn't appreciate as well and is harder to sell.
Work with An Agent.
An advantage of working with a real estate agent is that they can provide you with sales information of similar properties to better guide you on how much to offer.
Your agent can provide recent sales "comps" for similar homes in the neighborhood.
Finding the list prices is also important. Comparing the list prices with the sale prices tells you exactly what percentage of the list price sellers are getting.
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A landlord can't begin an eviction lawsuit without first legally terminating the tenancy. This means giving the tenant adequate written notice, in a specified way and form. If the tenant doesn't move or reform, for example, by paying the rent or finding a new home for the dog, you can then file a lawsuit to evict.
State law dictates the requirements to end a tenancy. Different types of notices are required for different situations, and each state has its own procedures as to how termination notices and eviction papers must be written and delivered or served.
Termination Notices
Although terminology varies somewhat from state to state, there are basically three types of termination notices for tenancies that landlords terminate due to tenant misbehavior:
• Pay Rent or Quit Notices are typically used when the tenant has not paid the rent. They give the tenant three to five days in most states to pay the rent or move out.
• Cure or Quit Notices are typically given after a tenant violates a term or condition of the lease or rental agreement, such as a no-pets clause or the promise to refrain from making excessive noise. Usually, the tenant has a set amount of time in which to correct the violation. A tenant who fails to do so must move or face the possibility of an eviction lawsuit.
• Unconditional Quit Notices are the harshest of all. They order the tenant to vacate the premises with no chance to pay the rent or correct a lease or rental agreement violation. In most states, unconditional quit notices are allowed only when the tenant has:
o repeatedly violated a significant lease or rental agreement clause
o been late with the rent on more than one occasion
o seriously damaged the premises, or
o engaged in serious illegal activity, such as drug dealing on the premises.
In some states, landlords may use Unconditional Quit Notices for transgressions that would require Pay or Quit Notices or Cure or Quit Notices in other, more tenant-friendly states. In these strict states, landlords may extend second chances if they wish, but no law requires them to do so.
Landlords may use 30-Day or 60-Day Notices to Vacate to end a month-to-month tenancy when the tenant has not done anything wrong. Many rent control cities, however, go beyond state laws and require the landlord to prove a legally recognized reason for eviction of tenants.
Following receipt of notice, if the tenant hasn't left or fixed the lease or rental agreement violation, you must properly serve the tenant with a summons and complaint for eviction if you still want the tenant to leave.
Reason Behind The Rules
There is a reason why most states have insisted on strict compliance. First of all, an eviction case is, relatively speaking, a very fast legal procedure. (How many other civil cases are over and done with after a few weeks?) The price to pay for this streamlined treatment is unwavering adherence to the rules.
Second, what's at stake here, a tenant's home, because of this fact legislators have been extra careful to see to it that the tenant gets adequate notice and an opportunity to respond.
Tenant Defenses
If the tenant decides to mount a defense, it may add weeks or even months to the process. A tenant can point to mistakes in the notice or improper delivery in an attempt to delay or dismiss the case. The way that you have conducted business with the tenant may also affect the outcome: If your rental unit is uninhabitable or the tenant thinks you are retaliating, this may shift attention away from the tenant's wrongdoing and diminish your chances of victory.
Removal of the Tenant
If you win the unlawful detainer lawsuit, you will get a judgment for possession of the property and/or for unpaid rent. But you can't just move the tenant and his things out onto the sidewalk, trying to remove a tenant yourself can cause a lot of trouble. Typically, you must give the court judgment to a local law enforcement officer along with a fee. The sheriff or marshal gives the tenant a notice of the judgment and a number of days to vacate. At that point the officer will return to allow you to physically remove the tenant’s belonging if he or she is not gone by then.
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Your home shelters you from the elements, and can also shelter you from taxes.
Your home provides many tax benefits; from the time you buy it through when you decide to sell it. Here's a summary of the tax benefits of home ownership; you can get details of all the tax advantages of home ownership by visiting the IRS website at www.irs.gov. As with all types of legal and financial issues, we recommend obtaining professional advice.
1. Mortgage Interest
Joint tax filers can deduct all the interest on a maximum of $1 million in mortgage debt secured by a first and second home. The maximums are halved for married taxpayers filing separately.
You cannot use the $1 million deduction if you pay cash for your home and later use it as collateral for an equity loan.
2. Points
Your mortgage lender will charge you a variety of fees, notably what are called "points." A point equals 1% of the loan principal. You can fully deduct points associated with a home purchase mortgage; however, you cannot deduct a mortgage broker's commission.
Refinanced mortgage points are also deductible, provided they are amortized over the life of the loan. Homeowners who refinance can immediately write off the balance of the old points and begin to amortize the new.
3. Equity Loan Interest
You may be able to deduct some of the interest you pay on a home equity loan or line of credit. However, the IRS places a limit on the amount of debt you can treat as home equity debt for this deduction. Your total home equity debt is limited to the smaller of:
• $100,000 (or $50,000 for each member of a married couple if they file separately), or
• the total of your home's fair market value,that is, what you would get for your house on the open market less certain other outstanding debts against it.
4. Home Improvement Loan Interest
If you take out a loan to make substantial home improvements, you can deduct the interest on this loan. There is no dollar limit on this deduction. The work must be a "capital improvement" rather than ordinary repairs.
Qualifying capital improvements are those that increase your home's value, prolong its life, or adapt it to new uses. Examples of qualifying improvements might include adding a fence, driveway, new room, swimming pool, garage, insulation, new heating/cooling systems, a new roof, and things of that sort.
Keep in mind that capital improvements that increase the square footage of your home could trigger a reassessment and higher property taxes.
Work that doesn't qualify you for an interest deduction includes such repairs as repainting, plastering, wallpapering, replacing broken or cracked tiles, patching your roof, repairing broken windows, and fixing minor leaks. Wait until you are about to sell your home to gain tax benefits from repair work.
However, you can use a home equity loan, up to the limits discussed above, to make repairs and deduct the interest.
5. Property Taxes
Real estate taxes or property taxes are fully deductible from your income.
6. Home Office Deduction
If you use a portion of your home exclusively for business purposes, you may be able to deduct home costs related to that portion, such as a percentage of your insurance and repair costs, and depreciation.
7. Selling Costs and Capital Improvements
If you decide to sell your home, you'll be able to reduce your taxable capital gain by the amount of your selling costs. Real estate broker's commissions, title insurance, legal fees, advertising costs, administrative costs, and inspection fees are all considered selling costs.
In addition, costs ordinarily attributed to decorating or repairs; painting, wallpapering, planting flowers, maintenance could also be considered selling costs if you complete them within 90 days of your sale and with the intention of making the home more saleable.
All selling costs are deducted from your gain. Your gain is your home's selling price, minus deductible closing costs, selling costs, and your tax basis in the property.
Your basis is the original purchase price, plus the cost of capital improvements, minus any depreciation.
8. Capital Gains Exclusion
This is a true tax shelter.
Thanks to the Taxpayer Relief Act of 1997, many home sellers no longer suffer a taxable gain. Married taxpayers who file jointly now get to keep, tax free, up to $500,000 in profit on the sale of a home used as a principal residence for two of the prior five years. Single folks and married taxpayers who file separately get to keep up to $250,000 apiece tax free, this includes single people who own a home jointly.
9. Moving Costs
If you move because you got a new job, you may be able to deduct some of your moving costs. To qualify for these deductions you must meet all of the following requirements:
• You must move within one year of starting your new job.
• Your new job must be at least 50 miles farther from your old home than your old job was.
• The distance between your new home and new job can't be greater than between your old home and new job; in other words, you cannot create a situation where your commute is longer than if you'd stayed put. An exception, however, is made if your new commute will, in practice, save you time or money, or if your employer insisted on the move as a condition of your employment.
• You must work full-time at the new workplace for 39 of the 52 weeks following the move. If you are self-employed, you must work full-time for at least 39 weeks during the first 12 months and a total of 78 weeks during the first 24 months after arriving at the new job location.
Deductions include travel or transportation costs and expenses for lodging and storing your household goods.
10. Mortgage Tax Credit
A home-buying program called mortgage credit certificate allows low-income first time homebuyers to benefit from a mortgage interest tax credit of up to 20% of the mortgage interest payments made on a home. This credit is available each year you keep the loan and live in the house purchased with the certificate.
The credit is subtracted, dollar for dollar, from the income tax owed. For example, if you paid $10,000 in interest, your tax credit would be $2,000. You would take the remaining 80% of the interest -- $8,000 -- as a mortgage interest deduction.
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Temporary Seller Financing is a technique used when traditional financing will not work, or is not desired for some reason. The term "simultaneous closing" refers to two closings occurring simultaneously, or at the same time.
Using this strategy, the seller creates the note, much like a bank would do, and then sells the note to an outside investor or investment company; All notes are purchased at a discount depending upon a variety of factors, including property type, size of the note, interest rate, note terms and especially the credit score and profile of the buyer.
Temporary Seller Financing is not meant to replace traditional, conventional lending… but is designed to be used as an additional alternative method of financing. For example:
When the buyer does not "bank qualify" because of a high DTI ratio (debt to income ratio), or is newly self employed, or has a low down payment, etc.
When the property has not moved and seller is ready to drop the price. Instead of dropping the price, the seller can offer owner financing, attract more buyers immediately, sell the property at full appraised value, and discount the note!
Everyone wins with Temporary Seller Financing.
The seller gets cash out at closing, the buyer gets a property he could not otherwise purchase, and the agents get commission. WIN! WIN! WIN!
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1. Above all else seek for the assistance of a high-caliber real estate agent.
There are lots of real estate brokers and independent agents working at selling houses. However too few are truely high caliber agents. Your first step to finding one is to check your local news paper, which ones have the largest ads with the most houses in your area. Take a drive through your area, see which agencies have the most signs and are holding the most open houses. Ask people you meet who recently bought in your neighborhood who they worked with and would they recomend them, after all to sell a house you need a buyer. Remember you are looking for an agencies that specialize in your neighborhood. From your findings narrow the field to 2 or 3 and meet with them to see if they are someone that you would like to work with.
An agent or a broker is a must when selling your properties unless you are skilled in this particular field or you are an agent yourself. There are lots of complex regulations in real estate, you cannot just let anyone handle your business.
2. Price your house correctly.
Sellers have the tendency to overrate and underrate their properties. Both ways are bad.
When you quote the property price too high you discourge buyers from looking or from making an offer if they do look. When a person is looking for a home to purchase they look in a price range. If your house is worth $150,000.00, but you have priced it at $160,000.00, people who are looking for a house in the range of $125,000 to $150,000 will never even look at your house because it's out of their price range.
On the other hand, when the price is too low, not only are you not getting what your intitled to, but your also loosing out on potential buyers. Like above if a buyer is looking for a house in the $125,000 to $150,000 price range, if your house is priced at $120,000.00 even though it is worth $150,000 they will not even look at it because they'll feel it's not good enough.
A quality agent can easily provide the reasonable price for your property based on other property selling in your neighborhood.
3. Make your house inviting and most of all appealling to new potential owners.
A common mistake among homeowners is to present the house as lived in, instead of livable.
People are typically very attached to their home, they fail to see that there are some things that must be taken away from the house during sale. For example, the sentimental value that a family picture may have could repel buyers.
The principle in selling a house is to make it appealling to the new owners, not the current owner. Remember that it is no longer your house, it will soon become another person's home. Thus, your mementos, awards, picture and everything that makes the house your home should be taken away. This also includes extra furniture and other objects that make the rooms seem cluttered or small. Put yourself in the buyers shoes, step outside and enter the house as a buyer, if anything looks even the slight bit odd to you, it will definitly stand out to a potential buyer.
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How much mortgage can I afford
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.
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.
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.
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.
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