Full Description

Take the fear out of buying your first home

For many, the process of buying a home for the first time can seem intimidating and overwhelming. How to Buy Your First Home is your resource for information on the subject. This book guides you through the entire process, including:

Preliminaries—Renting versus buying, determining what you can afford, deciding where to live

Searching for Your Home—What to look for in a home, hiring a realtor

Finances—Mortgage basics, government agencies, home loans for veterans

The Buying Process—Weighing your mortgage options, hiring an attorney, making an offer, inspecting and appraising your home

The Future—Caring for your home and increasing the value of your investment

Included within the text are Attorney Tip boxes that highlight important facts. Click on This boxes will guide you to helpful websites for additional information about calculating costs, locating homes in your area and more.

Extensive appendices include a glossary of important terms, contact information for state offices of real estate regulation and sample worksheets to help you as you make your decisions.

Written by an experienced attorney, How to Buy Your First Home is the resource that will take the mystery out of buying a home.

Table of Contents

Introduction

Section 1: FREQUENTLY ASKED QUESTIONS

Top 20 Questions of First-Time Home Buyers -

Section 2: PRELIMINARIES

Chapter 1: Buying versus Renting -
-Words
-First Time Home Buyers
-Financial Reasons
Equity
Tax Advantages
Passing to Heirs
An Investment
Buying vs. Renting
-True Cost of Home Ownership
-Intangible Reasons
Status
Privacy and Work Schedules
Community
-Conclusion

Chapter 2: Qualifying Yourself for a Mortgage -
-Your Credit History
-Credit Reports
Free Credit Reports
-Credit Scores
Improving Your Credit Score
-Credit Report Errors
Repairing Your Credit Report
Correcting Credit Report Errors
-Credit Counseling

Chapter 3: Calculating What You Can Afford -
-Common Debt-to-Income Ratios
Housing-to-Income Ratio
Debt-to-Income Ratio
-How to Use These Ratios
-From Monthly Payment to Total Mortgage
-Cost of Living Increases
-Your Lifestyle

Chapter 4: Qualifying the Neighborhood -
-How to Research a Neighborhood
On the Internet
Field Trips
In the Library
From Your Couch
-How to Select a Location
-The Food Shopping Test
-Other Cost of Living Amounts
-Public Improvement Plans
-Old vs. New

Section 3: SEARCHING FOR YOUR HOME

Chapter 5: Deciding Which House Features are Important -
-The Building, Itself
-Features
-Essentials
-Handy-Man’s Special or Fixer-Upper
-We are All Getting Older
-Condominiums and Townhomes
-Building from the Ground-Up
Building Your House
Buying in a Builder’s Development
Advantages/Disadvantages of Building

Chapter 6: Working with Real Estate Agents and Brokers -
-Real Estate Professionals
The Real Estate Profession
-Problems with Real Estate Agents
Changing Agents
-Whose Interest is Protected by the Real Estate Agent
-How Real Estate Agents get Paid
-Multiple Listing Services (MLS)
-Comparables
-Viewing a House Up for Sale
Notes and Checklists
Home Warranty
Home Inspection
-What Not to Say to Real Estate Agents and Sellers
-Games Played to Make the Sale
Inflating the Worth of the House
Another Offer
-When Do You Legitimately Need to Act Fast

Chapter 7: Handling the Emotional Side of a Home Purchase -
-Emotions in House Hunting
Under a Deadline
House is Beautifully Decorated
It is a Real Steal
Using the Seller’s Emotions
-Buyer’s Remorse
When Buyer’s Remorse is Legitimate
Legal Consequences of Allowing Buyer’s Remorse to Run Amuck

Section 4: FINANCES

Chapter 8: Explanation of Mortgage Basics -
-Prequalifying
-Preapproval
-Mortgage Lender Types
Portfolio Lenders
Mortgage Bankers
Direct Lenders
Mortgage Brokers
What Does This Mean for You
-Mortgage Types
Adjustable Rate Mortgage (ARM)
Assumable Mortgages
Balloon Mortgages
Buy-Down Mortgage
Convertible ARM
Deferred Interest Mortgage
Faith Financing
Fixed-Rate Mortgage
Subprime Mortgage
Wraparound Mortgage
Zero Down Mortgage
-Necessary Documents to Apply for a Mortgage
-Internet Mortgages
-Your Mortgage is Approved, Now Lock-In That Rate
-Your Mortgage is Not Approved
-Points

Chapter 9: Government Agencies and the
Secondary Mortgage Market -
-Housing and Urban Development Agency (HUD)
Federal Housing Administration (FHA)
Ginnie Mae
-Fannie Mae
-Freddie Mac
-Government Agencies and the First-Time Home Buyer
-Secondary Mortgage Market

Chapter 10: Additional Sources of Money -
-Living Together
Roommates
-Friends and Relatives
-Retirement Savings
-Local Government Assistance
-Zero Down Payment
-Low Interest Mortgages
-Renting with an Option to Buy
Pluses
Minuses

Chapter 11: VA Guaranteed Home Loans -
-Qualifying
-VA Appraisal
-The Loan
Approval
Advantages
Disadvantages

Section 5: THE BUYING PROCESS

Chapter 12: The Legal Side of Real Estate -
-Do I Need an Attorney
-Title Searches and Surveys
-How to Hold Title
Joint Tenancy
Tenancy by the Entireties
Tenancy in Common

Chapter 13: The Offer -
-The Contract
-What is in a Real Estate Contract
Components of a Real Estate Contract
-Negotiation
Things to Remember in Negotiations
-Earnest Money
Escrow

Chapter 14: Appraisers, Inspectors, and
Homeowners Insurance -
-Appraisers
-Inspectors
The Inspection
Defects
-Insurance
Home Insurance
Flood Insurance
Mortgage Insurance
Title Insurance

Chapter 15: The Closing -
-The Walk Through
-What Really Happens at a Closing
-Closing Documents
What to Bring to the Closing
-Closing Costs
-Problems

Section 6: THE FUTURE

Chapter 16: Enjoying Your Home -
-Responsible Home Ownership
-Keeping Utility Expenses Down
-Correspondence from the Mortgage Company
-Congratulations—You Get a Tax Benefit
-Reducing Your Mortgage Debt

Chapter 17: Foreclosure and How to Avoid It -
-Preventing Foreclosure
-When You Can’t Pay the Mortgage
-Federal Housing Authority (FHA), Fannie Mae, and Freddie Mac

Staying Positive -

Glossary -

Appendix A: Internet Sites by Subject -

Appendix B: Worksheets -

Appendix C: Sample Letters -

Appendix D: State Offices of Real Estate Regulation -

Appendix E: HUD-1 Settlement Statement -

Appendix F: HUD Offices -

Appendix G: VA Guaranteed Loan -

Appendix H: VA Regional Offices -

Index -

About the Author -

Excerpt

How Much Can You Afford for a Mortgage?

Every lender has a formula to tell how much a person can afford in mortgage payments. Formulas are good because they can give a definitive number. However, most formulas do not factor in a person’s lifestyle (what is important to that person), future financial down-turns, or what each person feels comfortable paying for housing.

COMMON DEBT-TO-INCOME RATIOS
Mortgage lenders loan money based on a set of criteria. That criteria rates the property, the neighborhood, the building, and the borrower. This chapter will explore the common criteria used to rate the borrower and how you can use that information to make decisions before you ask for a mortgage.

Housing-to-Income Ratio
Lenders usually use a two-part ratio calculation that sets the boundaries of what you can pay for a home. This is currently expressed as the 28/36 formula (but the exact numbers may change by the time you read this).

The first part, the front-end ratio or the housing-to-income ratio, is the total mortgage payment divided by your gross monthly income. The percentage result should be somewhere in the 28% to 33% range. Right now 28% is currently used by the majority
of lenders. Depending on your credit history, amount of debts, and amount of potential future income, your lender may change the front end percentage.

The total mortgage payment or housing costs includes: monthly loan payment, real estate taxes, home owners insurance, mortgage insurance (if any), and association fees (if any).

Gross monthly income is what you receive each month from every source. This income total is before taxes or any deductions (such as deductions for your 401(k) program) are taken out.

Debt-to-Income Ratio
The second part, back-end ratio or total debts ratio is the percentage of your gross income that can go towards all of your monthly debt. In the 28/36 formula, a person should not pay more than 36% of his or her monthly gross income for all debts.

Again, gross monthly income is what you receive each month from every source. This income total is before taxes or any deductions (such as deductions for your 401(k) program) are taken out.

Monthly debt includes payments on credit card debts, loans, alimony, child support, plus housing costs, but does not include household expenses like utilities, food, clothing, and the like.

Monthly housing costs are mortgage payment, real estate taxes, home insurance, mortgage insurance, and association fees.

HOW TO USE THESE RATIOS
So, you are probably looking at these ratios and saying “How does that affect me? All I want to do is to get a mortgage without the hassle of dealing with math equations.” Not only do I understand, I feel exactly the same. These ratios were created and are routinely
used by lenders, you know, those people who enjoy working with numbers. For the rest of us, these ratios can give us an approximation of what we can afford in a mortgage and for our total debt.

While we can use the ratios like the lenders (as guidelines and generalities to determine if someone qualifies for a mortgage loan), there are two important pieces of information on ratios. First—the ratios can vary by lender, by type of mortgage, and by what the economy is doing. Second—lenders do not only use these numbers. Other factors such as your credit history, the size of your down payment, the cost of the home, the appraised value of the home, and other facts about you and the property go into the decision to issue a mortgage.

This can be better explained through examples. Let’s follow two potential home buyers as they wade through the ratios. (We will also see how numbers can be deceiving.)

***
Example 1:
Janet is single. She works as a computer programmer making $42,000 per year. Her gross monthly income is $3,500.

According to the 28/36 formula:
Gross monthly income x 0.28 = Total monthly housing expense
$3,500 x 0.28 = $980

Or, in words, Janet can afford a $980 total monthly housing expense. (Remember that total monthly housing expense includes the mortgage payment, plus homeowners insurance, plus real estate taxes, plus any mortgage insurance payments or association payments.)

Looking at Janet’s debts:
Gross monthly income x 0.36 = Total monthly debt expense
$3,500 x 0.36 = $1,260

This shows that Janet’s total monthly debts should not exceed $1,260. Again, remember that this does not include those pricey household expenses such as utilities, food, clothing, transportation, and other living expenses.

Looking at Janet’s monthly debt, she is paying $150 a month on credit card bills and $100 a month on a student loan. If you add the $980 of a total mortgage payment plus the $250 a month on debts, Janet comes up with a total of $1,230 in obligations. This is $30 less than the maximum debt obligation that the 28/36 ratio allows.

So Janet should be approved to get a mortgage from the lender that uses this ratio. Or should she? The numbers look great, but what if the credit history is not so good? Janet’s employment history may be spotty. She may have had several jobs in the past 15 years, never staying longer than two years at each job. Janet’s employer may have publicly announced that they are closing. So, Janet may not automatically get the mortgage loan she wanted.

What if Janet’s credit worthiness is ok, but the property she wants has problems? Maybe the house is in terrible condition and did not appraise for the amount she is asking the bank to loan her? Janet may not be able to get the mortgage she wanted on that property.
***

These two scenarios show that although a person can be within the 28/36 ratio, there may still be problems obtaining a mortgage. In both of these cases, Janet may have to provide a larger down payment or she may have to select another property. On the other hand Janet, like many of us, may not feel comfortable with a $980 monthly mortgage payment. She may be planning to buy a new car, plus a house full of new furniture.

So how does the 28/36 ratio relate to real life? These numbers are merely maximums. This ratio says that Janet should not take on a total mortgage payment of more than $980 and that she should not have total debt of more than $1,260. So, if Janet can come up with a sizable down payment, or look for a house with a lower total cost, she may be able to get that total monthly mortgage payment down to around $600. This would allow her to go into more debt on other items.

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