Buying Real Estate
How Much House Can You
There are several ways to gauge how much you can afford to spend
on a house. But, before you go house-hunting, get pre-qualified
for a mortgage so you'll know in what price range you can shop.
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
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
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
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
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
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
How difficult is it to qualify for a mortgage
if you have a past credit problem?
Credit problems can make it harder to qualify, but it's quite possible
for buyers with poor credit to obtain a home loan.
Anyone who has had a financial problem-whether it was a matter of
late credit payment, delinquent taxes, or even a judgment that was
filed-should expect this data to be a factor when applying for a
How critical a factor? Minor lapses will probably have little or
no effect. However, buyers with serious problems may still qualify
for a loan, but they may have to pay a higher rate of interest or
provide a larger down payment. There are three steps that a person
with past credit problems should take before applying for a loan.
First, request a credit profile from one of three
major credit reporting agencies. To get copies of your credit report,
start at: CreditNow - Credit Reports
Second, the buyer should optimize his or her credit profile by citing
prompt payment of rent, utilities, and other bills not reported
on the credit profiles.
Finally, the buyer should be prepared to provide comprehensive and
candid explanations for any late payments to the loan officer. This
is important because problems not reported by the buyer but discovered
by the lender will reflect unfavorable.
Many lenders are understanding about one-time problems such as the
loss of a job, a medical emergency, etc.
Buyers with patterns of delinquent payments might
want to consider adding six months or a year of flawless credit
to their track record before pursuing their home-buying plans. So
remember-if you are thinking about purchasing a home, but are worried
about your past financial record-don't give up. There are solutions,
lenders and agents who are in business to help.
What are the five most common mistakes made
by first-time buyers-and how can you avoid them?
A good home-buying decision is one that fits your lifestyle and
your budget-a house you'll be able to resell when the time is right.
Sound simple? Not always.
Five common mistakes frequently made by first-time
1. Looking outside your price range. To avoid disappointment,
contact a real estate agent who can help you pre-qualify before
you start looking for a home. The agent can also provide valuable
insight on taxes and other expenses associated with a home (utility
2. Buying on impulse. Buyers-especially first-timers-may
be impressed by the first two or three homes they view. Look at
a good selection. List the positives and negatives. Narrow the prospects
to three or four, and then return for a closer look. Evaluate more
than just the property. Look at the surrounding area and community
amenities. Is this what you-and your family-want and need?
3. Not planning ahead. Think seriously about any
personal changes you are planning in the next five to seven years.
For instance, if you are planning on having children, consider how
the home will meet both your current and future needs. If a double-income
is necessary to qualify for financing-and make your payments-do
your plans foresee an income sufficient to continue making payments?
4. Failure to focus on location. Don't just focus
on the house, examine the neighborhood. Is the area safe, well maintained,
moderately quiet and close to work, stores, and schools?
Find out about zoning and what new construction is planned on any
vacant land in the immediate neighborhood.
Will the property be easy to market when you are prepared to sell
5. Failure to understand the home buying process. Once
you select a home, get involved. Find a real estate agent willing
to spend time with you, and don't hesitate to ask questions. Have
them explain the negotiation, financing and escrow processes and
other elements involved in the transaction.
Home-buying involves knowing the price, and what's
inside and around the property.Consider all your options carefully.
This may be the most important financial transaction of your life.
What's the real difference between a new home
and an old one?
While each offers its own style and charm, the difference usually
boils down to two things:
1. How the home fits into the buyer's lifestyle.
2. The condition of the property.
Homes that are 10 years old or less are generally better insulated
- or have dual-glazed windows or thermal panes - which translate
into lower heating and cooling bills. And, in today's rising energy
cost environment, these considerations are significant. Although
there are some exceptions, homes that have been built with all-electric
systems, generally have higher utility bills.
Homes that range between 15 and 20 years old may be in need of new
water pipes, especially if the old ones were galvanized and if a
water softener was used. Water softeners and galvanized pipe can
be deadly and, after 15-20 years, re- plumbing is usually required.
Have a plumber or general contractor inspect the pipes. Needless
to say, it can be expensive to re-plumb an entire system. Check
the built-in fixtures and appliances for any signs of damage.
Flush toilets, test all the water taps and the electrical sockets,
open and shut the windows, and try all the lights.
A window that will not open may be a sign of a more
significant problem-for example, a wall may have shifted, or worse
yet, it could indicate a problem with the foundation itself. It
is also a good idea to ask the seller for copies of past utility
bills. Examine them for some insight into what you can expect monthly
gas and electric costs to be. Although newer homes may be free of
significant physical or structural problems, there are other things
to consider in making your decision.
Generally, room size and yard size tend to be smaller
in some newer homes. While, on the other hand, they usually offer
the benefit of the latest building and design technology. Many new
homes also have more windows and natural light incorporated into
their design plan, allowing for a more spacious feel and efficient
Should a buyer get a professional inspection
for the home they are buying?
Definitely. Hiring a professional home inspector can save a great
deal of grief for buyers. The one exception would be when the home
is new and carries a written warranty by the builder. Many buyers
mistakenly believe that the only reason to have a home inspection
is to make sure that the house they're buying doesn't have defects
serious enough to warrant backing out of the transaction. But there's
more to it than that.
Certainly, an inspection will usually reveal major
problems that may even surprise the seller. The obvious ones are
corroded plumbing, antiquated and unsafe electrical systems, or
structural and foundation problems. And, the discovery of such problems
may cause the buyer to re- think his or her offer. Although a competent
inspector can uncover deal-crushing defects, these problems are
usually not commonplace. Typically, the seller will already have
told the buyer about anything major. More often, inspections reveal
less serious problems; problems that may not be serious but can
For instance, there could be a minor electrical defect,
or inferior ventilation of a heating system or fireplace. If so,
the buyer is usually in the position of having the purchase price
reduced, or the defect corrected. More important, it also prevents
the minor problem from developing into a major disaster a year or
two down the road.
There is, of course, the possibility that the home inspection will
produce another outcome: everything is fine. In this case, they
buyer gains piece of mind, confident about the major investment
he or she is about to make. That, too, is an enormous benefit for
the cost of the inspection.
Now, how does a buyer find a home inspection?
By asking their real estate agent, friends, or lender. Inspectors
are also listed in the Yellow Pages under "Home Inspection
Services." But, a word of advice, don't hire a contractor.
Contractors earn their living doing repair and renovation work,
so their recommendations aren't likely to be as objective as those
of a professional inspector.
Is real estate a wise investment?
There are fewer investments that have shown a better return. However,
the key to investing wisely in real estate is understanding how
the industry differs from others.
For example, when the defense industry dips, it usually
shows a national decline and the stock prices of defense-oriented
firms drop across the board. The same is true of most industries.
They are impacted nationally. That is not the case with real estate,
which is actually an industry and investment driven by local conditions.
One community may suddenly lose a manufacturing facility, and almost
overnight the market is flooded with properties for sale.
Obviously, the key to successful real estate investing,
like stocks and bonds, is to buy low and sell high. But, how do
you know when the "low" has been reached? Or, for that
matter, how can you judge when you property may be peaking in value?
Some investors rely partially on the media. They read the daily
newspaper, watch television and follow the trends. Although the
media provides a good deal of information, remember that by the
time things are printed or broadcast, the news may be old.
For instance, you will find statistics frequently
quoted in the media that have been supplied by the National Association
of REALTORS (NAR). But, NAR statistics-like most- tell you where
things have been, not where they are going.
So what can you do? First, check local economic indicators. Also,
the local chamber of commerce can frequently help. They usually
have information on which companies are moving in and out of an
Logically, the relocation of a firm into a community
generally indicates that demand for real estate in that marketplace
will increase-while if firms are moving out of the area, housing
demand will often shrink. Aside from economic indicators, check
real estate trends and cycles. Talk to a real estate agent. They
can provide statistics on how quickly homes have sold, how prices
have fluctuated in the past six to 12 months, and projections of
future home sales. They can show you how today's market compares
to last year's. Are sales headed up? Down? The same? The answers
will not only help you determine what the market is like in your
area, but they will also be critically important in helping you
determine when and where to make your real estate investment.
Does a home warranty protect a buyer in the event
something goes wrong after they have purchased a property?
Sometimes. That's because home warranties are often times misunderstood
and not every warranty provides the same protection. All warranty
companies are not equal, either.
Warranties, of course, were designed to protect buyers
from problems that emerged after they moved into a dwelling. For
example, if a major appliance breaks or the roof leaks, the ideal
warranty kicks in and pays for the repairs.
On the surface, this sounds simple and straight-forward. But, most
of the time it is not.
First, all warranties differ. Aside form the obvious
differences, the amount of deductible required, they may also vary
as what is covered and what is not. For instance, with some warranties
if the hot water heater works on the day of closing, but suddenly
does not work six months later, then it may be covered. And, with
other policies if the water heater was not in good working condition
when the home was purchased, and it breaks a week or two later,
there is no coverage.
Warranties can be critically important when it comes to new construction,
too. Obviously, the reputation of the builder is an important consideration.
However, problems with new homes can be enormously expensive if
they are not covered by a warranty.
There are two types of defects when it comes to new
homes - patent or latent. Patent are those problems which can be
seen. Cracked plaster, a fence that is off level, etc. Latent problems
develop later, and may not show up for five or six months. Ground
shifting, for example. Latent problems are usually more expensive
than patent problems.
Thus, the warranty for a new home can be one of the
most important documents executed during the buying process.
Whether you're purchasing a new home or a resale, remember that
warranties definitely have a place when it comes to protection and
peace or mind in the real estate transaction, but make sure that
you check them out carefully.
Is a final walk through, an inspection of the property
by the buyer before they move in -- really important? Yes, it is.
The intent of a pre-closing inspection is to give the buyer one
last opportunity to verify that they are getting all that was promised
in the sales contract. Although buyers still have legal recourse
if they discover-even after closing-that the condition of the home
is not as it should be.
The best time to identify problems is before closing,
when the seller will be motivated to correct any deficiencies in
order to close the transaction. Typically, a buyer takes possession
of a property one to three months after signing the sales agreement.
But, a lot can happen before the actual move-in. Appliances and
fixtures can break down, and walls, carpets and doors can be damaged
during the seller's move-out. Sometimes the seller will simply have
forgotten that he or she had agreed to leave the refrigerator or
window coverings with the house. Whatever the reason, problems identified
before closing have the best chance of being remedied.
If possible, schedule the inspection right before
the closing, such as the day before. Ask your real estate agent
to attend the inspection with you. What should you be inspecting?
Using a copy of the sales contract as a checklist, first make sure
that all items that should be in place (appliances, built-in furniture,
window coverings, fixtures, etc.) are there.
Test each appliance to make sure they work properly. Test all electrical
switches and the garage door opener, if there is one. Run the garbage
disposal and turn on every water faucet, checking under the sinks
for leaks. Flush the toilets. Inspect the floors, carpets, walls
and doors for recent damage. If you discover that something is damaged
or missing, make a note of it and inform your agent immediately.
In most cases, the seller is usually able to take
care of small problems immediately, either by making a needed repair
or offering compensation to handle it. And, if there are major problems
the seller can even sign a statement acknowledging the deficiency
and agree to correct it. Although pre-closing inspections take time
and may be inconvenient, they are important and well worth the buyer's
What are "contingencies" and why
are they important?
A "contingency," is an escape-clause that is added in-writing
to a contract which allows a buyer to back out of the transaction
if certain conditions aren't met. Some contingencies, often called
`riders'-like attorney approval of the contract, or the passing
of a home inspection-are obviously designed to protect buyers from
a poorly written contract or a defective home.
Other purchase contingencies may hinge on the buyer's
current living situation, or his or her cash-flow. For example,
when it comes to contingencies many first-time buyers can be better
prospects for a seller's home than move-up buyers. Why? Because
offers from homeowners usually are contingent upon the sale of their
present home. And, even if a move-up buyer has an offer for their
home in-hand, their buyer's offer may be contingent on another contingency
(or sale) and so on down the line. If one transaction in the chain
falls through, they all might. Cash offers can also be more attractive
Why? After all, the seller will get their money at
closing whether or not the buyer has cash or takes out a loan. True,
but cash offers don't require lender approval, and loan approval
is never a certainty and may delay or prevent closing. (Incidentally,
for this reason, buyers who get pre-qualified for a loan have an
edge over other buyers. A pre-qualified buyer is the same as a cash
Buyers offering a larger-than-customary amount of
"earnest money", (a deposit that accompanies an offer)
can be more appealing too. More money deposited with the signed
contract often demonstrates greater sincerity and motivation to
close the transaction.
here to find homes for sale via a real estate professional in the Sarasota
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