Your Mortgage Payment Explained
Your Mortgage Explained
As a renter you are used to sending your landlord a monthly payment, which sometimes even includes your utility payments. Once you become a homeowner, your monthly mortgage payment becomes more complicated.
Unless you are paying cash for your home, you will have a mortgage payment. There are typically four parts to this monthly mortgage payment, often referred to as PITI:
Principal: This is the portion of your payment that goes to pay down the balance that you borrowed. If you opt for a fixed-rate loan, your monthly payment will not change over the loan term, but the makeup of your payment will change. In the early years of your loan, you mostly pay interest, but gradually you will begin to pay more of the principal. For example, in the first month of a 30-year fixed-rate loan of $200,000 at 4.5%, your payment will be $1,014 with $264 toward principal and $750 toward interest. In 20 years, the payment will still be $1,014 each month—but the payment will be shifted to $647 toward principal and $367 toward interest.
Interest: The interest you pay is the cost of borrowing money.
Taxes: Your lender usually requires an escrow account and will collect one-twelfth of your annual property tax bill in this account with each mortgage payment.
Insurance: You will pay one year of homeowners’ insurance premiums at your home settlement as part of your closing costs, and then your lender will collect one-twelfth of your annual insurance premium in this account with each mortgage payment. While most lenders require you to pay your homeowners’ insurance this way, some offer you the option to pay the insurance company directly rather than include it in your monthly bill.
If you make a down payment of less than 20%, your mortgage payment may also include mortgage insurance, a fee you pay that protects your lender in case you default on the loan.
While there are sometimes exceptions to the rule, lenders generally require your house payment to be 31% or less than your gross monthly income. So when you are calculating how much you can afford to spend on a home, you should keep that figure in mind.
Other Housing Expenses
If you buy a condominium or a home within a homeowners association (HOA), you will also need to pay association dues. These dues are not part of your mortgage payment but will be considered as part of your debt-to-income ratio. Condo fees are usually collected monthly, and HOA fees can be collected monthly, quarterly or annually.
When you are making up a housing budget, you also need to estimate your utility costs—which you will pay separately from your mortgage. You can ask the sellers of a home you’re interested in for their average utility bills. Don’t forget you may need to pay not only gas and electric bills but also a water bill and possibly a trash removal fee.
As a renter, you’ve been able to call your landlord when an appliance breaks or you have a plumbing leak, but as a homeowner these problems will become yours. You need to budget for maintenance and repairs, but it can be difficult to predict what issues will arise in any particular year.
It also depends on the age and condition of your home. A home inspector can give you an idea of when you might need to replace particular appliances, but you can also keep about 1% of your home value available for emergency home repairs.
Budgeting for homeownership is a key element to maintaining your ability to keep your home and to help it hold onto its value. Making your monthly house payment is the biggest part of the financial commitment—but certainly not the only one.
Article originally posted on Realtor.com
http://www.realtor.com/advice/finance/your-mortgage-payment-explained/
What Home Buyers Need To Know About Insurance
What do Home Buyers Need to Know About Insurance
No sensible car owner would drive without insurance, so it figures that no homeowner should be without insurance, either. The essential idea behind various forms of real estate insurance is to protect owners in the event of catastrophe. If something goes wrong, insurance can be the bargain of a lifetime.
What Kind of Insurance and How Much?
There are various forms of insurance associated with homeownership, including these major types:
Title Insurance: Purchased with a one-time fee at closing, title insurance protects owners in the event the title to the property is found to be invalid. Coverage includes “lenders” policies, which protect buyers up to the mortgage value of the property, and “owners” coverage, which protects owners up to the purchase price. In other words, owners coverage protects both the mortgage amount and the value of the down payment.
Homeowners insurance: This insurance provides fire, theft and liability coverage. Homeowners policies are required by lenders and often cover a surprising number of items, including in some cases such property as wedding rings, furniture and home office equipment.
Flood insurance: Generally required in high-risk, flood-prone areas, this insurance is issued by the federal government and provides as much as $250,000 in coverage for a single-family home, plus $100,000 for contents. Local REALTORS® can explain which locations require such coverage.
Home warranties: With new homes, buyers want assurance that if something goes wrong after completion, the builder will be there to make repairs. But what if the builder refuses to do the work or goes out of business? Home warranties bought from third parties by home builders are generally designed to provide several forms of protection: workmanship for the first year, mechanical problems such as plumbing and wiring for the first two years, and structural defects for up to 10 years. Home warranties for existing homes are typically one-year service agreements purchased by sellers. In the event of a covered defect or breakdown, the warranty firm will step in and make the repair or cover its cost. Insurance policies and warranties have limitations and individual programs have different levels of coverage, deductibles and costs. For details, speak with a REALTOR®, insurance brokers and home builders.
When Do You Get Insurance?
The time to obtain insurance and warranty coverage is at closing, so speak with a REALTOR® or insurance broker prior to closing. Be sure to ask about limitations, costs, deductibles and “endorsements” (additional forms of coverage that may be available).
Originally posted on a Realtor.com article
http://www.realtor.com/advice/home-ownership-and-insurance/
Smart Financial Planning Must Come Before Home Ownership
Smart Financial Planning Must Come Before Homeownership
Whether you’ve got house envy about your best friend’s new place or just want to start building equity instead of renting, the first time you think about becoming a homeowner is the moment you should start financial planning.
While it may be tempting to begin looking at homes for sale, you need to be financially prepared so you don’t fall into the trap of identifying your perfect home—and then realizing you can’t afford to buy it.
Casual visits to open houses or random Internet searches are fine to see what homes cost where you want to live, but you will need to start working on your finances, too.
The most important elements of the financial planning you need to put in place before buying a home are developing a budget and starting to save.
Financial Planning for Homeownership
When you are ready to consult a lender to find out if you can be approved for a loan, the lender will base a decision on your credit profile, income, assets, job history and debt-to-income ratio.
Your debt-to-income ratio for the lender’s purposes is based on the minimum monthly payment for all of your credit card debt, student loans, car loans and personal loans—compared to your gross monthly income. In many cases the amount a lender will say you can borrow is higher than you may feel comfortable borrowing.
It’s crucial you decide what you think you can afford for your monthly payment and work with that number when you begin searching for a home.
Your comfort level should take into consideration other financial goals you have—saving for child-raising expenses, college tuition, retirement and even things like vacations, skiing or golf. Most of those expenses won’t be part of your lender’s calculation of what you can afford to spend on a housing payment.
Most lenders allow a maximum overall debt-to-income ratio of 43%, and some allow only a 41% ratio. The housing payment portion of your income should be a maximum of 31%, so if your annual income is $60,000 and your monthly gross income is $5,000, then your housing payment should be $1,550 or less.
Housing Payment
Homeowners have extra expenses renters don’t, such as property taxes and homeowners insurance. Your mortgage payment will include those costs as well as the principal and interest on your loan. You may also pay mortgage insurance if you make a down payment of less than 20%.
If you live in a condo or a community with a homeowners association (HOA), you will pay condo or HOA fees separately.
You should also budget for maintenance and repairs on your home, at least 1% of the home value.
Before you become a homeowner, you should create a budget based on your current finances and consider how you can adjust that budget to accommodate extra savings to allow you to buy a home and to afford potentially higher housing payments.
Saving Strategies
There are countless resources for living frugally and finding ways to save on everyday expenses such as your cable bill and groceries, but in order to save for a home you will need discipline to set aside money for the future.
Here are some ways to do that:
Create a special savings account for your home purchase and have part of every paycheck automatically transferred to that account. Start with as little as $100 if you can afford it so you get used to living on less and then gradually increase the amount.
Consider saving the difference between your rent and anticipated housing payment. This increase your savings, and you’ll also show a lender an established savings pattern and the ability to afford the housing payment.
Work extra hours or take on a second job temporarily to increase your income. Even something simple like walking dogs each evening or babysitting can help your savings accumulate more quickly.
If you get a bonus, a tax refund or a cash gift, deposit it into your home-buying account.
The simple process of creating a financial plan should be the beginning of a long-term plan to buy a house—and to keep it.
Article originally posted on Realtor.com
http://www.realtor.com/advice/smart-financial-planning-before-homeownership/
Make a Fair Offer
How to Make a Fair Offer
Like marriage, home-buying is one part love, one part legal transaction, and starts with a proposal. When you’re ready to buy a home, making an offer is important: oral promises are not legally enforceable in real estate sales.
REALTORS® usually have a variety of standard forms (including Residential Purchase Agreements) kept up to date with the changing laws.
In many states, sellers must comply with certain disclosure, and a REALTOR® will ensure that they do, as well as answer any questions you may have during the sale.
If you are not working with a REALTOR®, keep in mind that your purchase offer or contract must conform to state and local laws. State laws vary, and certain provisions may be required in your area.
Besides addressing legal requirements, making an offer should specify price and all other terms and conditions of the purchase. For example, if the sellers said they’d help with $2,000 toward your closing costs, include that in your written proposal and in the final contract—or you won’t have grounds for collecting it later.
After the offer is drawn up and signed, it will usually be presented to the seller by your real estate agent, by the seller’s agent, or often by the two together.
In a few areas, sales contracts are typically drawn up by the parties’ lawyers.
What to include when making an offer
Your purchase offer, if accepted as it stands, will become a binding sales contract—also known as a purchase agreement, an earnest money agreement or a deposit receipt. It’s important, therefore, the offer contain every element needed to serve as a blueprint for the final sale. These purchase offers should include the following:
- Address and sometimes a legal description of the property
- Sale price
- Terms—for example, this is an all-cash transaction, or the deal is subject to you obtaining a mortgage for a given amount.
- Seller’s promise to provide clear title (ownership)
- Target date for closing (the actual sale)
- Amount of earnest money deposit accompanying the offer—whether it’s a check, cash or a promissory note—and how the earnest money will be returned to you if the offer is rejected (or kept as damages if you back out of the deal for no good reason)
- Method by which real estate taxes, rents, fuel, water bills and utilities are to be adjusted (prorated) between buyer and seller
- Provisions about who will pay for title insurance, survey, termite inspections and the like
Type of deed that will be granted - Other requirements specific to your state, which might include a chance for attorney review of the contract, disclosure of specific environmental hazards or other state-specific clauses
- A provision the buyer may make a last-minute walk-through inspection of the property just before the closing
- A time limit (preferably short) after which the offer will expire
- Contingencies (these are extremely important matter and discussed in detail below)
Contingencies
If your proposal says, “This offer is contingent upon (or subject to) a certain event”, you’re saying you will go through with the purchase only if that event occurs. The following are two common contingencies contained in a purchase offer:
Financing. You, the buyer, must be able to get specific financing from a lending institution. If you can’t secure the loan, you will not be bound by the contract.
Home inspection. The property must get a satisfactory report by a home inspector “within 10 days after acceptance of the offer” (for example). The seller must wait 10 days to see if the inspector submits a report that satisfies you. If not, the contract would become void. Again, make sure all inspection conditions are detailed in the written contract.
Negotiating the price
Is the listed price the right price? A REALTOR® can give you a Comparative Market Analysis (CMA) of the home’s value, or you can check local listings on realtor.com® to see what similar properties sold for. Based on the home inspection, you might also ask for a lower price or repair contingencies if the home needs fixes.
You’re in a strong bargaining position—meaning you look particularly welcome to a seller—if the following conditions apply to your situation:
- You are an all-cash buyer;
- You have been pre-approved for a mortgage;
- You don’t have a house that must be sold before you can afford to buy.
In those circumstances, you may be able to negotiate discounts from the listed price. On the other hand, in a hot seller’s market, if the perfect house comes on the market, you may want to offer the full list price (or more) to beat out other early offers.
It’s very helpful to find out why the house is being sold and whether the seller is under pressure. Keep these considerations in mind:
- Every month a vacant house remains unsold represents considerable expense for the seller.
- If the sellers are divorcing, they may just want out quickly.
- Estate sales often yield a bargain in return for a prompt deal.
- Earnest money
Earnest money is a deposit you put down with your offer on a house. A seller is understandably suspicious of a written offer not accompanied by a cash deposit to show good faith. A REALTOR® or an attorney usually holds the deposit. The amount varies from community to community, and it becomes part of your down payment.
Buyers: The seller’s response to your offer
You will have a binding contract if the seller, upon receiving your written offer, signs an acceptance just as it stands, unconditionally. The offer becomes a firm contract as soon as you are notified of acceptance. If the offer is rejected, that’s that. The seller cannot change their mind later and hold you to the deal.
If the seller likes everything except the sale price—or the proposed closing date or the basement pool table you want left with the property—you may receive a written counteroffer with the seller’s preferred changes.
You can accept or reject it or to even make your own counteroffer—for example, “We accept the counteroffer with the higher price, except we still insist on having the pool table.”
Each time either party makes any change in the terms, the other side is free to accept or reject the offer or counter again. The document becomes a binding contract only when one party finally signs an unconditional acceptance of the other side’s proposal.
Buyers: Withdrawing an offer
Can you take back an offer?
In most cases the answer is yes, right up until the moment it is accepted—and in some cases even if you haven’t yet been notified of acceptance.
If you want to revoke your offer, be sure to do so only after consulting a lawyer who is experienced in real estate matters. You don’t want to lose your earnest money deposit or get sued for damages the seller may have suffered by relying on your actions.
Sellers: Calculating net proceeds
When an offer comes in, a seller can accept it exactly as it stands, refuse it (seldom a useful response), or make a counteroffer with the changes they want.
In evaluating a purchase offer, sellers estimate the amount of cash they’ll walk away with when the transaction is complete. For example, when they’re presented with two offers at once, they may discover they are better off accepting the one with the lower sale price if the other asks them to pay points to the buyer’s lending institution.
Once a seller has a specific proposal, calculating net proceeds becomes simple. From the proposed purchase price, they subtract the following:
- Payoff amount on present mortgage
- Any other liens (equity loan, judgments)
- Broker’s commission
- Legal costs of selling (attorney, escrow agent)
- Transfer taxes
- Unpaid property taxes and water bills
- If required by the contract: cost of survey, termite inspection, buyer’s closing costs, repairs, etc.
- The seller’s mortgage lender may maintain an escrow account into which they deposit money to pay property tax bills and home owner’s insurance premiums. In that case, remember sellers will receive a refund of money left in that account, which will add to their proceeds.
Sellers: Counteroffers
When sellers receive a purchase offer from a would-be buyer, remember that unless they accept it exactly as it stands, unconditionally, the buyer will be free to walk away. Any change the proposed buyer makes in a counteroffer puts the seller at risk of losing that chance to sell.
Who pays for what items is often determined by local custom. Sellers can, however, arrive at any agreement they and the buyers want about who pays for the following:
- Termite inspection
- Survey
- Buyer’s closing costs
- Points to the buyer’s lender
Buyer’s broker - Repairs required by the lender
- Home protection policy
- Sellers may feel some of these costs are not their responsibility, but many buyers—particularly first-timers—are short of cash. Helping a buyer may be the best way to get a home sold.
Whether you’re buying or selling, make sure a REALTOR® and/or an attorney evaluate all terms in the offer and counteroffers.
As soon as both parties accept the written offer, you have a legal contract.
Original article Posted on Realtor.com
http://www.realtor.com/advice/the-basics-of-making-an-offer-on-a-house/
How to Get a Mortgage With Bad Credit
How to Get a Mortgage when you have Bad Credit
If you have a credit score that’s considered fair, poor or even bad, you may be assuming that qualifying for a mortgage with bad credit is out of the question. While that’s true for some would-be borrowers who need to improve their finances as well as their credit, there are some mortgage options for home buyers with less than perfect credit.
Your Credit Profile
Mortgage lenders rely heavily on your credit score to evaluate your qualifications for a home loan, because your score indicates how you have handled credit in the past—which serves as a predictor of your future repayment pattern. According to Credit.com, excellent credit gets a score of 750 or above; good credit, 700-749; fair, 650-699; poor, 600-649; and bad credit is a score under 600.
Rather than guess your credit profile, you need to request your free credit report and pay a small fee to get your credit score fromwww.annualcreditreport.com. Fix any errors and take steps to improve your score with improved financial behavior long before applying for a mortgage loan. A lender can help you determine which steps will boost your credit score fastest, but depending on your situation, it could take at least several months or even a year before you can push your score high enough to qualify for the lowest interest rates on a conventional loan.
Loans for Borrowers With Poor Credit
In the thick of the housing boom, borrowers were approved for home loans without providing documentation of their income and assets. Subprime lenders approved loans for borrowers with low credit scores, although they often charged higher interest rates to those borrowers. Since the housing crisis, the majority of subprime lenders went out of business, but depending on your circumstances, you may still qualify for a home loan.
The most commonly used loan product for borrowers with lower credit scores is the Federal Housing Administration’s loan program. The FHA insures lenders against potential default and requires a minimum credit score of 580 or above for a loan with a down payment of 3.5%. Most lenders, though, require a credit score of 620 or 640 and above to approve an FHA loan. In addition to your credit score, you will need to provide full documentation of your income and assets and meet the lender’s debt-to-income ratio, which is typically a maximum of 41-43% of your monthly gross income that goes toward the minimum payments on all of your revolving and installment debts.
The downside of FHA loans is they have higher mortgage insurance requirements than conventional loans. The mortgage insurance payments must be made for the entire life of the loan unless you make a larger down payment. However, FHA mortgage rates are comparable to conventional loans regardless of your credit score, so you won’t be stuck paying a higher-than-average mortgage rate.
Special Programs for Credit Challenges
The financial crisis and recession hurt a lot of consumers who lost their homes and jobs. If your bad credit is a result of a personal financial hardship rather than your own mismanagement, you may qualify for the FHA’s “Back to Work” program, which allows borrowers to qualify for a home loan more quickly after a period of unemployment or reduced income.
The only way to know with certainty about your ability to qualify for a mortgage is to meet with a lender who can go over your individual financial circumstances. There is no charge to consult a lender, so even if you are not ready yet to get a loan approval, you can still benefit from a lender’s advice about how to prepare for a loan application.
Article originally posted on Realtor.com
http://www.realtor.com/advice/how-to-get-a-mortgage-with-bad-credit