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.
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.
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...
About the Author
Diana Brodman Summers received her J.D. from DePaul University College of Law and her undergraduate degree from Roosevelt University. She is an arbitrator for both the Cook and DuPage County mandatory arbitration programs and was recently appointed to the Liquor Commission for the City of Downers Grove. Ms. Summers is an active member of the Association of Trial Lawyers of America, the American Bar Association, the DuPage County Bar Association, and the Illinois State Bar Association.
Ms. Summers has taught seminars for lawyers through several bar associations and has written articles on computerizing law offices. She volunteers with other Illinois State Bar Association attorneys in accordance with the local Judge Advocate General’s office to provide low-cost legal service for returning members of the military. She currently maintains a law practice in Lisle, Illinois, a suburb of Chicago.
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How to Buy Your First Home, 2nd Edition
by Diana Brodman Summers
