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Chapter 7: Selecting and Financing Housing

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Helena Almendarez

on 16 November 2015

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Transcript of Chapter 7: Selecting and Financing Housing

Analyze lifestyle and Financial Stability
Mobile people, Rent
Anti-Mobile people, Buy
However if ones income level is low and you are Anti-mobile, renting may be your best option
Renting Activities
Renting VS. Buying Housing
Government Guaranteed Financing Programs
Loans guaranteed by the Federal Housing Authority (FHA) and the Veterans Administration(VA)
Government agencies do not provide mortgage but help home buyers obtain low interest and down payment loans
Must meet certain conditions related to down payment and fees
Low and middle income people qualify for FHA
The VA assists eligible armed services veterans with home purchases
The funds for FHA and VA loans come form financial institutions or mortgage companies reducing the government risks.
The Conventional mortgage
Equal payments over over 15,20,or 30 years based on fixed interest rate.
Amortization of a loan reduced the balance of the loan with each payment.
Larger mortgage payments made early during the year are mainly applied to interest with small reductions
in the past mortgages were assumable which allows a home buyer to continue with a sellers original agreement
assumable mortgage is better when mortgage rate is lower than market interest rates during the time of the sale
due to violent interest rate assumable mortgages are seldom offered

Types of Housing Available
Step 4: Obtain Financing
Chapter 7: Selecting and Financing Housing
Evaluating Your Lifestyle
Evaluating Renting and Buying Alternatives
How you spent your time and money
Everything you buy is a statement about your lifestyle
Renting is when a tenant pays for the right to live in a residence owned by someone else.
Helena Almendarez

Nicholas Gaytan

Samuel Nader III

Cesar Arellano
Housing Rental Activities
1. THE SEARCH: area, compare costs and units, talk to current/ past residents

2. BEFORE SIGNING A LEASE: verify important dates, talk to lawyer, note condition of rental unit.

3. LIVING IN RENTAL PROPERTY: keep everything in good condition, repect noise level.

4. AT END OF LEASE: clean appartment, tell landlord where to send security deposit, require deductions from security deposit to be documented.
Selecting an Apartment
Location
Building Exterior
Building Interior
Financial Aspects
Layout and Facilities
Legal Details
Lease: legal document that defines conditions of a rental agreement that includes
Address
Name of Owner/ Landlord
Name of Tenate
Date lease was signed, and how long the lease is
Security Deposit amount
Monthly Rent Amount and date due
Charges for late rent (date and amount)
List of appliances / Utilities included in rental amount
Restrictions
Charges for damages / Moving out early or late
Conditions under which the landlord many enter the apartment
A lease also includes things you do not agree on and negotiations
Leases can be written, or oral.
Cost of renting
Security Deposit: one month rent require when lease is signed
OTHER EXPENSES
heat
electricity
water
telephone
cable
HOME-BUYING ACTIVITIES
STEP 1: Determine Home Ownership needs.
Consider benefits and drawbacks
Evaluate how much you can afford.
ADVANTAGES
Deductibility of mortgage interest and real estate tax payments
Reducing federal income taxes
DISADVANTAGES
Large down payment and securing mortgage
Changing property values
Expensive
Responsible for Maintenance
Major Expense: Real Estate
Higher property values
Increased tax rates means higher real estate taxes
Building a Home
For people who want certain specifications

Make sure you have the knowledge money and perseverance

When choosing a contractor, consider:

the contractor's experience and reputation
the contractor's relationships (architect, suppliers, electricians, etc)
payment arrangements
Determine what you can Afford
The Mortgage
Amount spent on housing is affected by funds available for a down payment, your income, and current living expenses

Other Factor to consider:

current mortgage rates
potential future value of the property
ability to make monthly payments
Handy Man's Special
A home that needs work but able to purchase at a cheap price. More money will go into the house for repairs and improvements or do some of the work yourself.
Step 2: Find and Evaluate a Home
Select a Location
Home Inspection
Services of Real Estate Agents
Step 3: Price the Property
Fixed-Rate, Fixed-Payment Mortgages
The Down Payment
Adjustable-Rate, Variable-Payment Mortgages
Creative Financing
Other Financing Methods
referred to as flexible rate mortgage or variable rate mortgage has an interest rate that increase or decreases during the life of a loan
usually have low initial interest rate
borrower and the lender bears the risk of interest rate increase rate cap restricts the amount by which interest increases or decreases during the ARM term
payment cap keeps payments on adjustable mortgage at a given level or limits the amount to which those payments rise
mortgage payment do not rise but interest does amount owed can increase in months in which mortgage payments does not cover interest owed
increased loan balance is called negative amortization meaning the increase and decrease of home equity
Factors when evaluating adjustable rate mortgages
frequency of and restrictions on allowed interest rates
frequency of restriction on changes to monthly payment
investigate to see if the loan will be extended due to negative amortization and find out if a limit exist on the amount of negative amortization
find out what index is used to set the mortgages interest rate
Considered the most important when buying a home

Urban, Suburban, Rural settings
Small town or Resort Area
Balloon mortgage- when mortgage rates are high
fixed monthly payments and large final payment usually after 3,5,or 7 years can be used
financing plan is for people who want to refinance your the loan or sell the home before or when the balloon payment is due
interest only mortgage allows a home buyer to have lower payments for the first few years of the loan
after the initial period end mortgage adjust to be interest only and the new payment rate
interest only mortgages can be especially dangerous if the value of the property declines
buy downs are interest rate subsidy from a home builder, real estate developer or borrower that reduces the mortgage payments during the first few years of the loan
second mortgage more commonly called a home equity loan allows a homeowner to borrow on the paid up value of the property
this can keep you continually in dept as you request new cash advances
home equity can deduct interest on consumer purchases on your federal income tax return but creates risks of losing the home if required payments on both the firs and second mortgages are not made
reverse mortgages or home equity conversion mortgages provide homeowners who are 62 or older with tax free income in the form of a loan that is paid back when the home is sold or the home owner dies
finance your home that is obtain a new mortgage on your current home at a lower interest rate
financing decisions involves making extra payments on your mortgages.this amount will apply to the loan principal and you will save interest and pay of the mortgage in a shorter time
Zoning Laws
Restrictions on how the property in an area can be used
If you have a family, consider school factors such as:
program variety
achievement level of students
% of students who go to college
dedication of faculty members
involvement of parents
school funding
facilities
Real estate agents have information about housing in areas of interest to you

Main services include:
showing you homes that meet your needs
presenting your offer to the seller based on the market analysis
negotiating a settlement price
assisting you in obtaining financing
representing you at the closing


In some states, the agent could be working for the seller.
In others, the agent could be working for the buyer and the seller called the
Dual Agent

If dual agency exists, some states require buyers to sign a disclosure acknowledging they're aware the agent is working for both the buyer and the seller. The agreement can limit the information provided to each party.
An evaluation by a trained home inspector
Some states, cities, and lenders require inspection documents for pests, radon, or mold.
Mortgage company will usually conduct an appraisal (an assessment of the market value of the property
Conducting a Home Inspection
Exterior Facilities
Appearance of neighborhood
Condition of streets and sidewalks
Location of street lights, fire hydrants
Quality of landscaping, trees shrubs
Condition of driveway and garage
Outdoor lighting
Condition of patio or porch
Appropriate drainage system
Exterior Condition
Material quality and condition of building
Construction and condition of foundation
Condition of bricks, wood, or other siding
Condition and quality of windows
Condition and quality of roof and gutters
Type and condition of chimney
Interior Construction
Condition of electrical fixtures and wiring
Condition of plumbing fixtures
Adequate water pressure; water heater condition
Type and condition of heating unit
Quality/condition of walls, floors, and doors
Cracks or potential ceiling problems
Ease of operation of windows
Type and condition of floor covering
Condition, potential use of basement
Condition of stairways
Interior Design
Size and arrangement of rooms
Amount of closet and storage space
Door sizes for moving furniture
Counter space and layout of kitchen
Condition of kitchen appliances
Ventilation for cooking
Adequate laundry area
Location bedrooms relative to the other areas
Accessibility to attic and basement
Adequate electrical outlets
Determine the Home Price
Amount offered will be affected by:

recent selling prices in the area
current demand for housing
the time the house has been on the market
the owner's need to sell
financing options
features and conditions of the home

Offer will be in the form of a purchase agreement, or contract, which is your legal offer to purchase the home
Negotiate the Price
If initial offer is accepted, you have a valid contract

If offer is rejected, you have several options:

A counteroffer
If counteroffer is lower than the asking price, your next offer will be closer to that price
If counter offer is more than the asking price, you're closer to purchasing the home
If no counteroffer is forthcoming, you can make another offer to see if the seller is willing to negotiate


Buyer must present
earnest money
(a portion of the purchase price deposited as evidence of good faith)
At closing of home purchase, the earnest money is applied toward the down payment
The money is returned if the sale cannot be completed

Home purchase agreements may contain a contingency clause, stating the agreement is binding only if a certain event occurs
Amount of cash available for down payment affects size of mortgage required
Personal savings, sales of investments or other assets, and assistance from relatives are common down payment sources
Private mortgage insurance (PMI) is usually required if down payment is less than 20% (protects lender from financial loss due to default)
The Homeowners Protection Act
requires that PMI policy be terminated automatically when homeowner's equity reaches 22% at the time mortgage was executed
Homeowner's can request termination earlier if they can prove equity in home has grown to 22% of current market value
Step 5: Close the Purchase Transaction
The Closing Meeting
All parties gather to complete transaction

The Closing Cost
Fees and charges paid when a real estate transaction is completed (Settlement Costs) PG.233 Exhibit 7-9

Title Insurance
Insurance that, during the mortgage term, protects the owner or the lender against financial loss resulting from future defects in the title and other unforeseen property claims not excluded by the policy
Deed
Document that transfers ownership of property from one party to another

Escrow Account
Money, usually deposited with the lending financial institution, for the payment of property taxes and homeowner's insurance
Home-Selling Strategy
Mortgage
- long term loan on a specific piece of property such as a or other real estate
Payments on a mortgage are usually made over 10-30 years

Applying for a mortgage involves 3 main phases:
Complete the mortgage application and meet with lender to present evidence of employment, income, ownership of assets, and amounts of existing debts.
Lender obtains a credit report and verifies your application and financial status
Mortgage is either approved or denied based on financial history and evaluation of home

Major factors that that affect the affordability of mortgage are your income, other debts, the amount available for a down payment, the length of the loan and current mortgage rates
Points are prepaid interest charged by the lender
Each discount point is equal to 1 percent of the loan amount and should be viewed as a premium you pay for obtaining a lower mortgage rate
If you plan to live in your home a long time over five years the lower mortgage rate is probably the best action
If you plan to sell your home in the next few years the higher mortgage rate with fewer discount points may be better
Prepare Your Home for Selling
Fix needed repairs
Clear Garage
Keep lawn cut
Rake leaves
Remove unneeded items
Determining Selling Price
Appraisal - estimate of the current value of a property
Asking Price is Influenced by:
Recent sold homes in your area
Demand of house market
Current mortgage rates
Home Improvements
Remodeled kitchen
Added rooms or storage space
Fireplace
Outdoor patio
Sale by Owner
Advertise in local newspapers
Create a detailed information sheet
Gather Financing availability and requirements
Potential Buyer Information:
Name
Addresses
Telephone numbers
Background Information
Save several thousand $_$

10% of home sales are by owners
Listing with a Real Estate Agent
Person's knowledge of the community
Actively market your home
Suggest a selling price
Find potential buyers
Provide advice
Handle Financial aspects of sale
Single Family Dwellings
- Previously owned houses, new houses, and custom built houses
Multiunit Dwellings
- Have more than 1 living unit
Duplex
- a building with separate houses
Townhouse
- may contain 2, 4, or even 6 living units
Condominiums
- Individually owned housing units in a building. (Ownership does not include common areas such as hallways, outside grounds, and recreational facilities. Pay monthly fees for maintenance repairs, improvements, and insurance of the building and common areas.)
Cooperative Housing
- Form of housing in which the units in a building are owned by a non-profit organization
Manufactured homes
- Assembled in a factory and then moved to the living site
Prefabricated homes
- Have components built in a factory and then assembled at the housing site
Mobile Home
- Typically smaller than 1,000 square feet and can offer features such as a fully equipped kitchen, fireplace, cathedral ceiling, and whirlpool bath. (can be purchased or leased)
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