Brigandi Realty Home Buying

Homebuying 101

Where do I start?

First things first. After you've browsed through the information awhile, ask yourself why you want to buy a home. To stop paying rent? To start building equity? To have a place of your own? To move up to a bigger home?

Next, list what kind of home you'd like and where you would like it to be. Be specific. Separate the "must haves" from the "want to haves." Rate both lists on a scale from 5 (high) to 1. Think of yourself as zeroing in on a target, going from the general to the specific. Consider area (city, suburban, country); community (north, south, east or west side); neighborhood (older and settled or sparkling new; a particular school; recreational facilities; and other community services, such as transportation, day care, library, stores, entertainment). Ask yourself how many minutes you're willing to commute to work.

Think about hoe styles (1-story, 2-story, townhouse, condominium, etc.). How much space do you need, and how much will you need in the foreseeable future (number of bedrooms, baths; kind of kitchen; total rooms)? Consider size and kind of property. Do you want a new home, an older one to fix up? Is the community a good area for resale? Someday you or your heirs will want to sell. Consider how long you expect to live in this particular home. Keep going with whatever you want to add. Knowing exactly what you think you want makes house-hunting and later decisions easier when you get into the nitty-gritty aspects of buying. Many people like to start a "house-hunter's notebook" to keep their requirements clearly in mind and to compare specific properties. You'll find as you return again and again to your original thinking that your preferences become clearer-and your search becomes more efficient.

Exactly how will a real estate agent help me buy a home?

Brokers and agents make it their business to provide every service connected with your home search, from expert advice in the early stages through careful monitoring of your settlement (also "closing" or "escrow"). The more closely you work with one agent, the better your needs are known and the more effectively you can be served-saving you time and possible grief.

All agents are bound by law to deal fairly and ethically with both buyer and seller. Some buyers may choose to work with a "buyer's agent," whose legal obligation is to represent the interests of the buyer. A "buyer's agent," whose fee or commission may be paid by either buyer or seller, is able to negotiate sale price and terms on behalf of the buyer.

You benefit from an agent's services in many ways such as:

· Helping you set up a plan of action through an analysis of your needs and your finances, the current housing market, homes available in your price range, and lenders' mortgage options.

· Personally conducting your search to find neighborhoods and homes that fit your requirements.

· Guiding you through the intricacies of making an offer on a home and presenting your offer to the seller.

· Assisting you through both the pre-settlement and settlement processes.

What do people mean when they say home ownership is the key to financial security?

The benefits of home ownership are both financial and psychological:

· Home ownership is a durable (real) investment. Historically, housing has appreciated in value for decades. Although no one can say a specific home in a specific location will increase in value, generally speaking the odds favor most homeowners. Also, monthly mortgage payments (the part that reduces the principal loan balance) becomes a solid form of savings.

· Numerous unique tax advantages are available to homeowners. Unlike other investment tax shelters, home ownership works for you even as you live in your investment. For example, the thousands of dollars you pay in mortgage interest (discussed below) are deductible. The tax deduction alone can sometimes make owning your own home cheaper than renting with "after-tax" take-home dollars.

· By accumulating equity in your home, you can later "move up" to another home, with a good down payment on hand.

· Home ownership offers you the opportunity to take control of your housing costs. Mortgage payments (even on adjustable-rate mortgages) are more predictable than rent.

· Owning your own home allows great freedom of choice in choosing your community, architecture, interior decor, appliance selection, plus whatever method of financing best suits your situation.

What are some of the tax advantages of owning a home?

Tax breaks enter the home ownership picture from all angles: buying, owning and selling. Remember, tax laws are constantly changing and complex,. and you should consult with your professional tax advisor before filing any claims on your tax returns. Here are the basics as of this writing:

Home Buying

Tax-savings begin with deductions allowed for:

· Settlernent charges for the use of money, such as (A point is a sum equal to one percent of your loan amount. Points are charged to increase a lender's yield and attract money into the housing market. For example, one point on an $86,000 loan is $860; two points total $1,720.) Even points paid by the seller are, in many instances, a tax deduction for the buyer!

· Prepaid interest on prorated loan payments made between settlement and your first mortgage payment.

· City, town and/or county real estate taxes on the purchased property.

Home Ownership

Your home provides shelter for both you and your taxes. For example:

· The interest paid on your loan is deductible, as are your property taxes. This interest deduction is also a major tax advantage in owning a second home for yourself.

· You may deduct a portion of your home expenses if you have a qualifying home office.

· Many health-related additions to your home required by your doctor (such as air conditioning for an asthma sufferer) are deductable, provided the addition does not add to the value of your home.

· Casualty losses (such as flooding, hurricane damage, etc.) that are not reimbursed by insurance are deductible, subject to income limits.

Home Selling

When you sell your home, tax savings help defray many of the expenses of selling, such as:

· Up to $500,000 of any capital gain realized on selling your residence is excluded from taxation ($250,000 for singles and those using married, filing separate status).

· If you are paying a tax because your gain is larger than the $500,000 or $250,000 exclusion amounts, you can subtract the cost of home improvements from your net sale price. ("Net sale price" is your sale price minus closing costs, broker's and lawyer's fees.) You can also subtract title insurance fees, recording fees, transfer taxes and other acquisition costs. This reduces your gain, and also your taxes.

· You can reduce your immediate tax burden, in situations where the gain is larger than the exclusion amounts, by making an installment sale where you spread out your income - and taxes - over a period of years.

· If, when you sell, you have to pay a penalty for pre-paying your mortgage, that charge can be deducted. Fortunately, few mortgages have prepayment penalties today.

· Under certain conditions, you may deduct moving deductions within limits.

Is it true my paycheck will get bigger when I buy a home?

Yes, if you're renting now or if your mortgage interest payments are higher than you pay now. Buying a home adds to your "take home" paycheck because you can increase your withholding allowances in anticipation of mortgage interest payment deductions on your next tax return. By increasing your allowances, you reduce the amount withheld to pay future taxes-which puts your tax refund in your paycheck today, not at the end of the year. Ask your tax preparer to estimate how many allowances you should claim to compensate for reduced taxes caused by the interest deductions.

What price home can I afford to buy?

The easy answer to this all-important question of price is simply adding how much you can afford to borrow to how much you have available for your down payment investment. The total is your maximum affordable home price. (Remember to keep enough cash or credit left over for move-in expenses and an emergency reserve.) The harder answer is how much you are qualified to borrow.

For starters, you can put the most frequently-used lenders' rule-of-thumb to work: the 28% and 36% formulas. This is the test many lenders use to qualify applicants for conventional mortgage loans (though some lenders and mortgage plans apply stricter codes, such as 25% and 33%, especially if your down payment is less than 20% of the sale price).
The 28% test permits you to spend no more than 28% of your gross monthly income on your total monthly housing costs, including principal, interest, taxes and insurance (P.l.T.I.) and condominium fees, if any.

For example:

28% of a $3,600 gross monthly income would qualify a buyer for a $1,008 per month payment.

The 36% limit covers both your P.I.T.I. and long-term debts (more than 10 months) such as alimony, regular household expenses (mortgage insurance and/or condominium or association fees), outstanding loans (car, appliances, school), support for children (resident or living separately). For example: 36% of $3,600 would qualify for a $1,296 payment per month less monthly payments on any long-term debt.

In our examples, the affordable loan payments for an income of $3,600 per month is a range between $1,008 for the home payment alone and $1,296 a month less any debt payments. (Strict lenders may use only the 28% standard, even with no debts, or ask you to meet both standards. Other lenders may use less strict standards for borrowers with excellent credit ratings.)

In addition to your loan, the cash you have on hand (plus the cash you can acquire) is an important factor. You will need cash for a down payment (ranging from 0-5-10-20% or more of the sales price), closing costs, moving expenses, possible immediate repairs, remodeling, new appliances or furnishings. Also be sure to budget for utilities and maintenance. This takes some figuring.

An agent can help translate your affordable monthly payment into a total loan amount. Add this loan amount to your desired down payment amount and you get the approximate range of home prices you can afford. Your next step is to shop carefully for the loan that will keep your mortgage payments in line with your budget Different mortgage plans can dramatically affect your monthly payment and thus the price home you can afford. Also other plans, especially FHA and VA mortgages, may offer you much more liberal qualifying standards again allowing you more home for your income.

Today's financing techniques can be confusing. what are the basic types of loans I should know about?

Here is a brief run-down of four major mortgage plans:

Fixed Rate Conventional Mortgage. A conventional loan is a loan made to a buyer without a third-party participant, such as VA or FHA. Fixed-rate conventional loans are typically paid off in equal monthly payments spread over 15, 20, or 30 years. The interest rate stays the same for the life of the loan; therefore the monthly principal and interest payment remains constant. Shorter terms mean somewhat higher monthly payments. Shorter terms also mean more rapid equity growth, mortgage payoff and dramatic savings on total interest payments. Terms of a conventional loan vary among lenders, but many can be obtained with as little as a down payment. When the down payment is less than 20%, it is necessary to obtain private mortgage insurance (PMI) to protect the lender from a buyer's default.

Advantage: Quick processing and stable payments.

Mortgage (ARM; also "variable rate"). The interest rate may go up or down over the years and is tied to a financial market index (such as one-year Treasury bills). Monthly payments may also be adjusted on a periodic schedule. Most ARM's set a maximum adjustment (or cap") on possible increases to interest rates, monthly payments, and/or maximum cap on rates for the life of the loan.

Advantage: The lower initial interest rate and monthly payment allow the buyer to pay less in the early years for a larger loan and help buyers qualify for a more expensive house than with a fixed-rate loan. Caps offer pea~ of~ind rate ceilings.

FHA Loan: Strictly speaking, FHA (Federal Housing Administration) does not make loans; rather it insures loans, which increases lenders' willingness to make low down payment loans.

With an FHA-insured loan, a home buyer can make a small down payment, a feature particularly attractive to first-time buyers. The down payment can be as low as 2.25%, depending on the size of the loan. Second mortgages are permitted within specific guidelines.

Points (prepaid interest) can be charged by the lender. The purchaser may negotiate the interest rate and points with the seller. FHA buyers of single-family homes can finance 100% of closing costs.

FHA charges an advance mortgage insurance premium (MIP) fee, as well as a monthly charge for all loans. Ask an agent how much the fee would be in your situation, and if you can borrow some of the fee and add it to the loan rather than measurably increasing your closing costs.

FHA-insured mortgages offer a maximum loan amount that varies area to area.

Advantage: Low down payment; low interest rates; long terms; many are fully assumable loans; no prepayment penalty; second mortgage permitted under certain circumstances.

VA Loan. Qualified veterans can take out loans up to a specific limit with no down payment. These limits occasionally change; check with an agent for current rules. VA-guaranteed loans can be combined with second mortgages and are fully assumable by any qualified buyer. Rates and points may be negotiated with the lender.

VNFHA qualification guidelines are more flexible than those for conventional loans. Actual income qualifications are dependent on the type of loan requested.

Advantage. Usually no down payment; points can be paid only by the seller, although the buyer is charged a loan origination fee (tax deductible); no prepayment penalty; assumption may make your home very attractive to buyers when you decide to sell.

How much down payment should I make?

There are advantages to both large and small down payments, and which you choose depends on both personal choice and your financial circumstances.

Advantages of a large down payment: Less mortgage to pay off, smaller monthly mortgage payments and greater opportunity to find lower interest rates.

Advantages of a small down payment: Less cash out of hand, therefore more money for other costs; a larger monthly mortgage payment means a larger tax deduction for mortgage interest.

With an FHA loan or less than a 20% down payment on a conventional loan, you will be required by the lender to take out mortgage insurance. The FHA calls it MIP (Mortgage Insurance Premium), while private companies call it PMI (Private Mortgage Insurance).

What are the best sources of cash for a down payment?

If your own bank account isn't large enough, you have several options. For example
Receive a tax free gift from your parents (0r others):
documented by a gift letter stating no repayment is required (thus your debt. burden is not incurred). Some lenders may require you to use some of your own money in addition to the gift.
Borrow against a life insurance policy
Borrow against a company pension plan.
Cash in a retirement savings plan (even though you may have to pay a penalty for early withdrawal).
Ask for a cash payment from your employer instead of next years raise.
Obtain an advance on a future inheritance.
Use your own business as collateral.
Team up with friends, relatives, or investor as partners in return for equity in your home (you can, if you like, buy them out later)

Should shop for a loan before or after I find a place to buy?

It's a food idea to let an agent help you look for financing before you find a home. The agent is in constant contact with many lenders, and can act as an invaluable "clearing house: of information. If you're actively house hunting but have not found the right home yet, ask the lender to do a "screening application." This details your income, debts, and assets.
Knowing where you stand concerning how much money a lender will lend you based upon your income and credit rating puts you in a good bargaining position. Sellers faced by deciding between two buyers, one who is "pre-screened," by a lender may favor the offer of the buyer for whom getting a loan is most likely a sure thing.

House Hunting

From experience we know once you've mapped out a good strategy, you and an agent are on firm ground to begin hunting for the home that's right for you. House hunting is a logical process the agent has experienced over and over again. As you turn corners and discover new questions along the way, you can count on expert guidance to take you through the maze of evaluating homes and neighborhoods and to understand today's mortgage market. You're well on your way.

What steps are involved in house hunting?

Your first step is to consult with the real estate agent and outline a sound home search strategy (as discussed in "Getting Started"). Next (in approximate order) comes researching, with the agent's help, area's, neighborhoods, homes, and financing.
Then you start moving, touring neighborhoods and inspecting homes. When you find what you like, you make an offer to purchase (possibly contingent on a home inspection, financing, etc.). After you reach an agreement with the seller, who signs the offer to purchase (also "binder," or, for new homes, a "contract of sale"), you may want to have the home inspected to remove the contingency. Then you consult with the agent about lenders and your mortgage application comes next.
About this time you may hire a lawyer to review your contract, mortgage, and perhaps other matters if you feel it's necessary. Once your mortgage is approved, you take out whatever insurance policies you'll need.
As closing date approaches, you notify movers, utility and phone companies. At settlement, you sign a collection of documents, and pay your down payment and closing costs. In return, you get copies of the papers and the keys to your new home.

What's the best way to know what kind of home is right for me?

By examining your lifestyle carefully. Ask yourself such questions as:
· "How much time do I expect to be at home?" If you're a real homebody, you might think about a single family home with an inviting yard that will take hours of care; if you're on the run a lot, a condominium, with no yard care, might suit you better.
· "Do I really like swinging a hammer?" If so, an older home's a good bet.
· "Do I like neighbors around but want a good-sized home, not an apartment?" Perhaps a townhouse would suit you best.
· "what style home attracts me7' Each has practical as well as aesthetic advantages. See the illustrations of specific home styles in this chapter.

What's the most efficient way to know what's on the market?

The primary source of information about what's happening today in the housing market is the local Multiple Listing Service (MLS). Brokers throughout your area enter properties for sale into the MLS, and an agent can show you any home listed, or in some areas the agent calls the listing agent first.
Before you actually hit the road you can search the system to find homes that meet your description: area, property size, kind of home, style, number and size of rooms, appliances, water and heating/cooling systems; plus extra features such as fireplaces, saunas, landscaping, pools, etc.
Financial information is also included: price, mortgage balance, monthly payments, cash needed to assume the seller's mortgage (if it's assumable), whether or not the seller offers second-mortgaging, and annual taxes.

What should I look for in a neighborhood?

Some neighborhoods speak loud and clear at first glance: the quality of life is apparent in its streets, parks, buildings, homes and yards. You get a feel for it (either for or against) just by looking.

A real estate agent can, of course, fill you in on community details not so obvious at first glance:
· Where schools, supermarkets, libraries, hospitals, places of worship, fire and police stations are located.
· What zoning regulations apply.
· What community services are available.
· What construction plans are in the offing.
· What shifts in transportation facilities are occurring.
· Whether home values have appreciated or depreciated.
· What tax rates prevail.
For a more intimate impression, you should walk around a neighborhood that looks attractive to you. Visit the schools your children will attend to confirm district boundaries and comparisons with other schools. Talk with people at bus stops (ask about commuting schedules and costs), in shops (chat about where the best stores are), in parks (get folks talking about recreational programs), in front yards (ask what they like and dislike about the neighborhood). You might take instant photos as you tour different locales. They'll help you later when you want to keep different streets and homes separate in your mind. Also take notes to later compare, especially addresses and prices.
Inspecting a neighborhood is as necessary as inspecting the home you may buy. An old real estate maxim says, "The best time to think about selling your home is when you're buying it." That's because location will be a prime factor influencing future buyers when it comes time to sell your home.