The Federal Reserve Board’s Triennial Survey of Consumer Finances recently revealed the net worth of a homeowner was $231,400 compared to $5,200 for a renter.  The net worth of homeowners increased 15% from 2013 to 2016 while renters’ decreased by 5%.

Appreciation and principal reduction are the two dynamics that affect a homeowner’s equity.  Each payment is applied to the interest for the previous month and the principal reduction to retire the mortgage.

A $300,000 home purchased with a $294,566 FHA mortgage at 5% for 30 years has an average monthly principal reduction $362 in the first year. Two percent appreciation would benefit the buyer by $500 a month.  In this example, the equity grows by $860 a month for the homeowner.  A tenant would have to invest $660 a month over and above the rent they’re paying.

Based on the assumptions listed above, the $10,500 down payment would become approximately $85,000 of equity in seven years. Leverage and forced savings contribute to the difference in addition to the appreciation and principal reduction.

The rent paid by tenants help the landlord recoup their investment in the home and a return on their investment.  Some people say, regardless if a person rents or buys, they pay for the house they occupy.  The choice is whether to buy it for themselves or their landlord.

Check out some of the benefits using your own numbers with this fill-in-the blank Rent vs. Own.

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Pre-appproval confidence

There are so many benefits to getting pre-approved, it rarely makes sense to not do it.

 

 

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Changing Air Filters

If this were a test, would you make an “A” on air filters 101?

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There is a little-known mortgage program that could provide the vehicle for the right person to get into a home. If a person sells their home to another for less than the fair market value, the difference in the appraised value and the sales price is considered a gift of equity for the buyer.
FHA requires that borrowers receive gifts of equity only from family members transferring title to the borrower.

An appraisal is required to determine the value of the home. The sales price is subtracted from the appraised value to determine the equity to be gifted. If a home appraises for $300,000 when the owner will sell it for $250,000, the gift is $50,000.

The gift is applied to the down payment. In this example, the borrower would have to qualify for a $250,000 mortgage which would require private mortgage insurance because a 20% down payment on a $300,000 home would be $60,000. If the buyer had an additional $10,000 in cash to put down, the PMI would not be required, and the monthly payments would be lower.

The seller would need to provide a gift letter stating the amount of the gift, the date the gift, and that no repayment is expected or required. It also needs to have the donor’s name, address, phone, email and relationship to the buyer. In addition, the settlement statement will need to show the gift being credited from the seller to the buyer. The lender may require additional documentation.

Beginning in 2018, the annual gift tax exemption is increased to $15,000 per person per year and lifetime exemption to $5.6 million. The fact that the $50,000 exceeds the individual amount doesn’t mean there will necessarily be any gift tax due now. The seller should consult their tax professional.

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It may be natural for first-time buyers to be unsure of the process of buying a home because they haven’t been through it before but even repeat buyers need to know changes that have taken place since the financial housing crisis.

The steps in the home buying process are predictable and generally follow the same pattern.  It certainly makes the move stay on schedule when you know all the different things that must be done to get to the closing.

  • In the initial interview with your real estate professional, you share the things you want and need in a home, discuss available financing and learn how your agent can represent you in the transaction.
  • The pre-approval step is essential for anyone using a mortgage to purchase a home to assure that they’re looking at the right price of homes and so they’ll know what they can qualify for and what the interest will be.
  • Even with lower than normal inventory, it is difficult to stay up-to-date with the homes currently for sale and the new one just coming on the market.  Technology has simplified this process, but the buyer needs to implement them.
  • Showings can be accommodated online through virtual tours, drive-bys and finally, a personal tour through the home.  Your real estate professional can work with you to see all the homes in the market through REALTORS®, builders or for sale by owners.
  • When a home has been identified, an offer is written and negotiation over price, condition and terms takes place.
  • A contract is a fully negotiated, written agreement.
  • Escrow is opened to deposit the earnest money from the buyer as a sign they’re acting in good faith.  The title search is also started so that clear title can be conveyed from the seller to the buyer and that the lender will have a valid lien on the property.
  • 88% of home sales involve a mortgage.  The lender will require an appraisal to be sure that the home can serve as partial collateral for the loan.  If the buyer has been pre-approved, the verifications will be updated to be certain that they’re still valid.  The entire loan package when completed, is sent to underwriting for final approval.
  • When the contract is completed, at the same time the title search and mortgage approval is being worked on, the buyer will arrange for any inspections that were called for in the contract.
  • After all contingencies have been completed, the transaction goes to settlement where all of the necessary papers are signed, and the balance of the buyer’s money is paid.  This is where title transfers from the seller to the buyer.
  • Possession occurs according to the sales contract.

One of the responsibilities of your real estate professional is to make sure that things are done in a timely manner so that the transaction will close according to the agreement on time and without unforeseen or unnecessary problems.

Even if you’re not ready to buy or start looking yet, you need to be assembling your team of professionals.  Let us know and we’ll send you our recommendations, so you can read about them on their websites.

If you have any questions, call us at (320) 762-7106; we’re happy to help.  Informed buyers lead to satisfied homeowners and that is better for everyone involved.

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Finding the right home is still the biggest challenge buyers are faced with in today’s market as is shown in the latest Confidence Index Survey.  Assuming the buyers find the “right” home with determination, perseverance and the help of a real estate professional, 88% of all transactions last year required financing to get the buyer’s address on the home.  93% of first-time buyers needed financing.

Pre-approval is an essential step that needs to be handled before buyers begin searching for a home.  The benefits to the buyer fall into the category of confidence.

PRE-APPROVAL GIVES YOU CONFIDENCE

  • Knowing the amount you can borrow
    the mortgage amount decreases as interest rates rise
  • Looking at the right priced homes
    price, size, amenities, location
  • Comparing and identifying the best loan
    rate, term, type
  • Uncover issues early that could affect the most favorable loan terms
    time to cure possible problems
  • Bargaining power to negotiate with the seller and possibly, competing buyers
    price, terms, & timing
  • Settlement can occur sooner after contact is accepted
    verifications have already been made

Items Needed for Pre-Approval

  • Photo ID
  • Two months current pay stubs
  • Last two year’s W2s
  • Complete copies of checking and savings statements for last three months
  • Copies of statements for IRAs, 401k, savings, CDs, money market funds, etc.
  • Employment history for last two years with addresses and contacts
  • Proof of commissioned or bonus income
  • Residency history for last two years with addresses and contacts
  • Assets for down payment, closing costs, and reserves; must provide paper trail
  • If self-employed, last two years tax returns, current profit and loss statement and balance sheet; copy of partnership/corporate tax returns for last two years if owning more than 25% of company
  • FHA requires driver’s license and social security card
  • VA requires original certificate of eligibility and DD214
  • Other things may be required such as previous bankruptcy, divorce decree

Contact us at (320) 762-7106 or paulajackson@realtor.com if you’d like a recommendation of a trusted mortgage professional.

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When the standard deduction for married couples filing jointly was increased from $12,700 to $24,000 for 2018, there was some speculation that the bloom was off the rose of homeownership.  The thought was that if the tax benefits from being able to deduct the property taxes and interest was less than the standard deduction, that maybe, the buyer would be better off continuing to rent.

With mortgage rates as low as they have been for the past eight years, payments have been lower and so has the amount interest that was paid.  This and the fact that sales and local taxes, which include property taxes, are limited to $10,000 a year on the Itemized Deduction form have made it harder to reach the increased standard deduction.

The reality of the situation is tax benefits are only one of the components that make a home an excellent investment and it probably contributes the least of the top three benefits.  Principal reduction and appreciation build an owner’s equity in an automatic way that is like a forced savings account.

In today’s market, it is common for the total house payment to be lower than the rent a first-time home buyer is currently paying.  As a homeowner, the buyer would have additional expenses like maintenance and possibly, a HOA.

To illustrate the net effect, let’s look at a purchase price of $275,000 with 3.5% down payment on a 4.75% 30-year FHA loan.  We’ll assume the home appreciates at 3% annually and the buyer is currently paying $2,000 a month rent.

The total payment is $2,115 including principal, interest, property taxes, property and mortgage insurance. However, when you consider the monthly principal reduction, appreciation, maintenance and HOA, the net cost of housing is $1,181. It costs $819 more a month to rent than to own. In a year’s time, it would cost $9,831 more to rent than to own which is more than the down payment required to buy the home.

In seven-years, the $9,625 down payment would grow to over $58,000 in equity.  The equity build-up far exceeds the tax benefits which some people would have as an additional incentive.  Use this Rent vs. Own to see what the net cost of housing would be using a home in your price range or call me at (320) 762-7106 and I’ll do it for you.

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It may be an all too common belief that a person will have a house payment and a car payment for the rest of their lives.  However, with a plan and some determination, you can be mortgage free.

Planning for retirement is obviously important and many times, an activity plagued by procrastination.  Some homeowners’ goal is to have their home paid for by retirement, so they won’t have payments.  It makes sense to eliminate a sizable recurring expense before they quit working.

By making regular principal contributions in addition to the payments, the debt can be eliminated by the target retirement date.

Assume a homeowner refinanced their $300,000 mortgage at 4% last year for 30 years with the first payment due on May 1, 2017.  With normal amortization, the home will be paid for at the end of the term.

Additional principal contributions with each payment will save interest, build equity and of course, accelerate the payoff on the home.  An extra $250.00 a month would pay off the mortgage 7.5 years sooner.  $786.81 extra with each payment would pay off the loan in 15 years.

Having a home paid for at retirement has the apparent benefit of no house payment.  A debt-free home is also a substantial asset that could be borrowed against or sold if unanticipated events should occur.

To make some projections to pay off your own mortgage, use this use the Equity Accelerator calculator.

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The gutters and downspouts on your home are intended to channel rainwater away from your home and its foundation.  When they’re blocked and not functioning properly they can lead to the gutters coming loose, wood rot and mildew, staining of painted surfaces, and even worse, foundation issues or water penetration into the interior of the home.

Most experts recommend cleaning the gutters at least once a year.  More often might be necessary depending on the proximity of leaves and other debris that could collect.

If this is a task that you feel comfortable about tackling yourself, there are few things to consider.  If the debris is dry, it will be easier to clean the gutters.  Safety is important, and precautions should be taken such as using a sturdy ladder and possibly, having someone hold it while you’re on the ladder.

Other useful tools will be a five-gallon plastic bucket to hook on the ladder to hold the debris; work gloves to protect your hands from sharp edges of the gutters; a trowel or scoop and a garden hose with a nozzle.

?         Start by placing the ladder near a downspout for the section of gutter to be cleaned.

?         Remove large debris and put it into the empty bucket. Work away from the downspout toward the other end.

?         When you’re at the end of the gutter, using the water hose and nozzle, spray out the gutter so it will drain to the downspout.

?         If the water doesn’t drain easily, the downspout could be blocked.  Accessing the spout from the bottom with either the hose with nozzle or a plumber’s snake, try to dislodge the blockage.

?         Reattach or tighten any pieces that were removed or loosened while working on the downspout.

?         Flush the gutters a final time, working from the opposite end, as before, toward the downspout.

There are specialized tools at the home improvement stores like Lowes and Home Depot that can make this job easier.  Check out their websites and search for “gutter cleaning”.

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Congress enacted the Dodd-Frank Act in 2010 in response to the mortgage crisis that led to America’s Great Recession.  The two parts that apply closely to homebuyers are the Ability-to-Repay (ATR) and Qualified Mortgages (QM).

A Qualified Mortgage is a category of loans that have certain, more stable features that help make it more likely that borrowers will be able to afford their loan.  These loans do not allow certain risky features like an interest-only period when no money is applied to reduce the principal; negative amortization that would allow the mortgage balance to increase; and, “balloon payments” at the end of the loan that are larger than the normal periodic payments.

A debt-to-income ratio of less than or equal to 43% has been established to provide a limit on how much of a borrower’s income can go toward total debt including the mortgage and all other monthly debt payments.  However, the Consumer Finance Protection Bureau believes these loans should be evaluated on a case-by-case basis and in some cases, can exceed 43%.

There is a limit for up-front points and fees the lender can charge.

By showing that the lender made an effort to be certain that the borrower has the ability to repay the loan, the lender in turn, receives certain legal protections.  Underwriting factors considered by the lender include:

  1. current or reasonably expected income or assets
  2. current employment status
  3. the monthly payment on the covered transaction
  4. the monthly payment on any simultaneous loan
  5. the monthly payment for mortgage-related obligations
  6. current debt obligations, alimony, and child support
  7. the monthly debt-to-income ratio or residual income
  8. credit history

For more information, see the Consumer Financial Protection Bureau fact sheet … protecting consumers from irresponsible mortgage lending.

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