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First Steps For First-Time Buyers
By Sally Anderson In his 1990 book Washington Homes, author and real estate broker Jim Stacey claims that there are three stages for the first-time home buyer: contemplation, comparison and commitment. He urges prospective buyers to get through the first stage on their own, with the help of friends and family members. The road between contemplation and being ready to commit to buying a house is arduous and emotional, and Stacey has learned that the best use of a broker's time and skills is to enter the fray after buyers have done some preliminary footwork.
Part of this background work is figuring out whether you're ready to be a homeowner-financially, psychologically and emotionally. First, make sure your credit record will appeal to a lender. If you have doubts, get a copy of your credit report in advance. (You can do this online for free at ConsumerInfo.com and other Web sites). If your credit history is less than shiny, you're probably better off renting while you buy down your debts and polish up your record.
Figuring Out What You Want
No matter how well you can picture your dream house and communicate your ideal to a Realtor, the house you finally fall in love with may have little resemblance to the image you started out with. But you have to begin somewhere, and a detailed wish list is a great head start. Let's say your wish list looks like this, in order of priority:
- Two bedrooms, two baths
- Safe, quiet neighborhood
- Garden
- Ability to add on
- No major repairs needed
- Near close friends or family members
- Close to downtown
- Craftsman-style detached home
- Lots of natural daylight
- Parking
- Good investment with excellent resale potential
- Affordable property taxes
- Neighborhood matches family personality, culturally and politically
- Enclosed laundry area
- Walk-in closet in master bedroom
- Storage space for sports equipment
- Gas hookup for stove
- Back deck or patio
- Close to work, schools, church
- Finished basement for office or guest room
- No threat of commercial encroachment
- Within 1/2 hour of the airport
- Hardwood floors
- French doors leading to backyard
- Close to public transportation
Now, how would the list change if you had to settle for only 10 of your wishes in your price range? If you had to narrow it to five, would your top priorities be different? When you start looking at houses, this information will be invaluable to a Realtor as he or she matches your requirements to available houses.
What Can You Afford?
Every market is different, but the first step to answering this question is finding out what you can pay on a monthly basis after you've made your down payment-5, 10 or 20 percent of the asking price of the house.
Visit a loan officer. The best way to learn what you can afford is to get prequalified for a loan. Your Realtor may recommend someone or you can just walk into the office of a local lender. Prequalifying won't cost you anything, except a probable sales pitch, since the lender would like your business when you're ready to apply for a loan. You'll walk away with a good idea of how your income, assets and liabilities translate into what you can afford, and it can also help your chances of beating out the competition in a sellers market (where there are more buyers than houses on the market).
Do the math. You can also do a simple calculation on your own. Broker wisdom says that monthly payments should be 25 to 33 percent of your monthly gross income. To calculate: Take your monthly income before taxes, including all sources, and divide it by four. Subtract from this figure the total amount you pay per month in debts (loans, charge accounts and the like). The result is the lower end of what you can reasonably afford to pay on a monthly basis. After deducting monthly homeowners insurance (say, $50 per month) and property tax payments ($100), you'll see approximately what you can afford for your monthly loan payment. To calculate the higher end, divide by three instead of four.
To find out how this translates in terms of house pricing, multiply your final total above by 12 (months) and then divide that number by the average interest rate on loans today-say, 7 percent. The result is the approximate market you'll be focusing on.
Additional costs. Keep in mind that in addition to the purchase price you'll need extra cash for closing costs (including points and fees), inspection and future expenses. All in all, to get through closing-meaning, once you've signed the last remaining paper after agreeing on price and terms with the seller-the cost will typically be 2 to 7 percent more than the agreed-upon selling price. If you calculate that from the middle zone, at 4.5 percent, a $200,000 house will cost $209,000 to purchase. Be sure to consider annual property taxes and repairs (predictable and unexpected).
Take heart in knowing that most first-time buyers are simply getting into the market. Your dream house may be two or three houses into the future, so don't feel like you have to spend every penny you can afford if it means trading off some cherished freedom.
Starting the House Hunt
Now that you have an idea of what you can afford, you can focus on whether you're in the market for a condominium, co-op, townhouse, single-family detached home or-hey, it happens-a mansion that will accommodate 20 of your closest friends. Begin interviewing Realtors based on recommendations. A great Realtor can educate you about what to look for and avoid, provide reliable references for other experts you'll need along the line-such as lenders and inspectors-and represent you in negotiations and at closing. It definitely pays to shop around.
Now you're ready for the fun stuff: pounding the pavement. Go to as many open houses as you can stand, even at times your broker isn't available, and then go to another. (Just be sure to sign in under your broker's name.) In the neighborhoods you're considering, include some homes you know you can't afford and some priced below your means. Think of it as leveling out your learning curve.
Talk to friends and family about their buying experiences. People are often surprisingly open about what they've learned about financing, construction-and even themselves-in the course of buying their first house.
And finally, if there are times when you just can't bear to see another overpriced house with kelly-green shag carpet, take a day off-and remind yourself that someday you'll know it was all worthwhile.
Sally Anderson is a writer and editor based in Seattle
How To Complete a 1031 Tax Deferred Exchange
by Janet Wickell
What is the purpose of a 1031 exchange?
A 1031 tax deferred exchange allows you to roll-over all of the proceeds received from the sale of an investment property into the purchase of one or more other like-kind investment properties. At closing, proceeds are transferred to a third party--called a facilitator or qualified intermediary--who holds them until they are used acquire the new property.
A 1031 exchange is often referred to as a Starker exchange.
Exchanges Allow You to Delay Capital Gains Taxes
Capital gains taxes are deferred if all of the exchange funds are used to purchase like-kind investment property.
The deferment is like getting an interest-free loan on the tax dollars you would have owed for a cash sale. More equity is retained, and that helps you move into properties of higher value each time you perform a 1031 exchange.
What's Eligible?
A 1031 exchange is possible when you sell real estate held for investment purposes.
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It cannot be used for the sale of your personal residence.
Like Kind Properties
Exchanged properties must be like kind. For a real estate exchange this means real-property for real-property, but not necessarily land for land or a rental house for another rental house. Take a look at the IRS rules for specific information about what types of properties qualify as like kind.
You can exchange a single property for multiple properties, or purchase one property from the proceeds of several. Proceeds not used to purchase new investment property are taxed as a cash sale.
"In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business." -IRS
-Page 2, Setting Up a 1031 Exchange -->
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Windows can add a lot to a home's character. But if they're old and worn, they can also add to your heating and cooling bills.
From Better Homes and Gardens
In older houses, faulty windows can account for a third of the total heat loss in winter and as much as 75 percent of interior heat gain in summer. Look for the following telltale signs that a window has lost its effectiveness:
- Stand inside your house on a windy day with a lit candle near the window's operative edge. If the flame flickers or goes out, your weather stripping might be damaged.
- During the winter, if a window develops ice buildup or a frosty glaze on the interior of the pane, the ventilation in your home may not be adequate. Another possibility is that your window may not be providing enough insulation value, a situation that can make your heating bills soar.
- If you need to prop open your window with a book or a stick, the window may have lost its functionality.
- Sit near your window. If you feel cold air coming in during the winter or warm air during the summer, your windows have little insulation value. This means you're paying more to heat and cool your house to compensate for the exterior air entering your home.
- Do your windows get fogged with condensation? If so, you may have a seal failure and need to replace the glazing or the entire window.
In some cases, replacing broken panes and tending to loose or missing weather stripping may buy some time. If your windows are old and ill-fitting, however, you need more than stopgaps. (Read more about securing windows.)
Replacement window options
Wood is the choice of most homeowners. Wood is strong, insulates well, and has natural appeal and a warm look. It needs exterior maintenance, and interior surfaces can be painted, stained, or finished any number of ways.
Vinyl windows do not need to be painted or stained-a plus on the exterior. They offer good insulation value and strength, making them a viable alternative to wood.
Aluminum windows have a stronger frame but poorer insulation than wood or vinyl. They're fine in areas with a mild climate, and are also used for commercial applications.
Fiberglass combines the higher strength and stability of aluminum with the insulating properties of wood and vinyl. Fewer options are available at this time, as fiberglass is just beginning to show up in the window market.
Combination windows are available with wood on the interior and vinyl or aluminum on the exterior, combining the look of wood with a low-maintenance exterior material. This is known as "cladding" (as in vinyl-clad or aluminum-clad). (Read more about window shopping.)
Features to consider
Energy efficiency. Almost any good-quality window available today incorporates two pieces of glass with a sealed airspace between then as a buffer between indoors and out. Some windows are even triple-paned. You may have the option of argon gas instead of air between the glass to further the window's insulating abilities. Most window manufacturers also offer such options as low-E glass, which reflects heat and screens out the sun's rays.
Design. Windows are available in shapes ranging from quarter rounds to ovals. Consider an arrangement of smaller windows instead of one large one, or vice versa.
Ease of installation. The easiest type of replacement window is a frame-within-a-frame design that can be installed in an existing frame without disturbing walls or trimwork. Some are sold in kit form, complete with hardware, for standard sizes. If your original windows have divided lights or panes, look for multipane replacements or snap-in grilles that match glass dividers on the old units as closely as possible. If your windowsills are rotting or damaged, however, you'll need to replace the old frame as well.
Ease of maintenance. Weather-resistant materials will reduce your regular maintenance; vinyl or aluminum-clad exteriors need no painting. For ease of cleaning, choose windows that tilt in or open from the side. Many double-hung windows now come with tilting sashes so both interior and exterior glass surfaces can be cleaned from inside the house.
Function. Tempered glass is required by code for certain applications, such as glass doors and some window installations with low sill height. For more extreme conditions, such as coastal environments, consider laminated impact-resistant glass designed to withstand hurricane-force winds and the impact of airborne debris.
Hardware. Some manufacturers offer improved hardware for crank-out windows such as casements and awnings -- specifically, collapsible or low-profile handles that don't interfere with blinds or other window coverings. Others offer a variety of style options for latches and locks. To be safe, ask about these and any other convenience features before the units end up in your walls. Also, try the hardware in the showroom. Does the window lock, unlock, and open easily? This test gives you a feel for the window's usability and its overall quality as well.
Cost guidelines
Broadly, vinyl and wood are the least expensive, fiberglass costs more, and clad windows are even more. That said, a general price range for an average size (30-inch by 48-inch) window is $100 to $200, which will be higher in urban areas.
More features-like tilting versions and higher E-ratings-increase the cost, although sometimes as the price and quality increase, more options are included. Differences in the up-front purchase price of a window may eventually be offset by other factors. Energy efficiency and a no-maintenance exterior will offset the up-front cost difference over time. Second, installation and labor costs could actually be higher for an "economy-grade" all-wood window, if you factor in charges for painting, and how much sooner you may have to replace it than a window made from more durable material.
One way to keep your window costs from rising is to avoid special orders. Try to work with standard sizes from a manufacturer, and select from the standard styles and features that your local retailer stocks.
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| 8 Hot Design Trends with Big Pay Offs |
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Mark Nash, the author of "1,001 Tips for Buying and Selling a Home" and the soon-to-be-published "Real Estate A-Z for Buying and Selling a Home," says home sellers should consider the trends that are going to be popular with homebuyers this year. After surveying 923 real estate agents, Nash has the following eight suggestions for making your home attractive to buyers:
- If you're redoing a kitchen or bathroom, consider using glass tiles instead of ceramic ones. They're gaining popularity again because of reflective qualities.
- Avoid installing bowl-shape, above-the-counter bathroom sinks. They look pretty but have proved to be harder to maintain and keep clean.
- Use engineered stone compound for kitchen countertops. The material is less expensive than granite and is expected to be the trend this year.
- Don't install too many glass cabinet doors in your kitchen. They look better in magazines than they do in real life, where homeowners must keep their cabinets in perfect order or suffer embarrassment.
- Consider replacing a wooden or chain-link fence with a wrought-iron one. Wrought-iron fences portray a look of luxury.
- When repainting trim for shutters, doors and window frames, go with bold and deep colors. And don't get rid of the trim around interior window openings -- it only looks cheap.
- If replacing floors, avoid bamboo. This flooring was popular when it debuted, but now users are saying it is easily dented and scratched. It is also more likely to warp due to weather and humidity.
- If you're adding new construction, don't employ concrete blocks in exterior walls. They are not attractive and are more likely to leak moisture if not properly installed.
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| 12 Reasons to Choose a Realtor |
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12 Reasons to Choose a REALTOR®
1. Your REALTOR can help you determine your buying power - that is, your financial reserves plus your borrowing capacity. If you give a REALTOR some basic information about your available savings, income and current debt, he or she can refer you to lenders best qualified to help you.
2. Your REALTOR has many resources to assist you in your home search. Sometimes the property you are seeking is available but not actively advertised in the market, and it will take some investigation by your agent to find all available properties.
3. Your REALTOR can assist you in the selection process by providing objective information about each property. Agents who are REALTORS have access to a variety of informational resources. REALTORS can provide local community information on utilities, zoning, schools, etc. There are two things you'll want to know. First, will the property provide the environment I want for a home or investment? Second, will the property have resale value when I am ready to sell?
4. Your REALTOR can help you negotiate. There are myriad negotiating factors, including but not limited to price, financing, terms, date of possession and often the inclusion or exclusion of repairs and furnishings or equipment. The purchase agreement should provide a period of time for you to complete appropriate inspections and investigations of the property before you are bound to complete the purchase. Your agent can advise you as to which investigations and inspections are recommended or required.
5. Your REALTOR provides due diligence during the evaluation of the property. Depending on the area and property, this could include inspections for termites, radon, asbestos, faulty structure, roof condition, septic tank and well tests, just to name a few. Your REALTOR can assist you in finding qualified responsible professionals to do most of these investigations and provide you with written reports. You will also want to see a preliminary report on the title of the property. Title indicates ownership of property and can be mired in confusing status of past owners or rights of access. The title to most properties will have some limitations; for example, easements (access rights) for utilities. Your REALTOR, title company or attorney can help you resolve issues that might cause problems at a later date.
6. Your REALTOR can help you understand different financing options and identify qualified lenders.
7. Your REALTOR can guide you through the closing process and make sure everything flows together smoothly.
8. When selling your home, your REALTOR can give you up-to-date information on what is happening in the marketplace and the price, financing, terms and condition of competing properties. These are key factors in getting your property sold at the best price, quickly and with minimum hassle.
9. Your REALTOR markets your property to other real estate agents and the public. Often, your REALTOR can recommend repairs or cosmetic work that will significantly enhance the salability of your property. Your REALTOR markets your property to other real estate agents and the public. In many markets across the country, over 50% of real estate sales are cooperative sales; that is, a real estate agent other than yours brings in the buyer. Your REALTOR acts as the marketing coordinator, disbursing information about your property to other real estate agents through a Multiple Listing Service or other cooperative marketing networks, open houses for agents, etc. The REALTOR Code of Ethics requires REALTORS to utilize these cooperative relationships when they benefit their clients.
10. Your REALTOR will know when, where and how to advertise your property. There is a misconception that advertising sells real estate. The National Association of REALTORS studies show that 82% of real estate sales are the result of agent contacts through previous clients, referrals, friends, family and personal contacts. When a property is marketed with the help of your REALTOR, you do not have to allow strangers into your home. Your REALTOR will generally prescreen and accompany qualified prospects through your property.
11. Your REALTOR can help you objectively evaluate every buyer's proposal without compromising your marketing position. This initial agreement is only the beginning of a process of appraisals, inspections and financing - a lot of possible pitfalls. Your REALTOR can help you write a legally binding, win-win agreement that will be more likely to make it through the process.
12. Your REALTOR can help close the sale of your home. Between the initial sales agreement and closing (or settlement), questions may arise. For example, unexpected repairs are required to obtain financing or a cloud in the title is discovered. The required paperwork alone is overwhelming for most sellers. Your REALTOR is the best person to objectively help you resolve these issues and move the transaction to closing (or settlement).
Copyright NATIONAL ASSOCIATION OF REALTORS®, used with permission.
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Legal Issues in Real Estate
Numerous laws and regulations affect the buying and selling of property in our state.
Your Illinois REALTOR® knows what is required under current law, and what changes are being considered that can affect your transaction.
What you should know about:
Radon Disclosure
The Illinois Radon Awareness Act requires that before a buyer will become bound on a contract to purchase real estate the seller will be required to provide a pamphlet entitled "Radon Testing Guidelines for Real Estate Transactions" and the Illinois Disclosure of Information on Radon Hazards. The pamphlets are provided by the Illinois Emergency Management Agency Division of Nuclear Safety.
Carbon Monoxide Detectors
In 2006, the Illinois General Assembly passed a new law which requires the placement of Carbon Monoxide Detectors in residences. Find out what you should know about detectors and your compliance with this law.
Lead-Based Paint Hazard Reduction Act
Federal regulations regarding disclosure of lead-based paint and lead-based paint hazards were jointly released from the U.S. Environmental Protection Agency and the Department of Housing and Urban Development. The regulations focus on disclosure and REALTOR® liability.
Seller Disclosure
Illinois' Residential Real Property Disclosure Act, "Seller Disclosure," became effective October 1, 1994. The Act is a consumer protection law designed to give buyers the benefit of the seller's knowledge about the condition of the property they are buying.
The Mortgage Process
Securing an affordable home loan with fair terms requires understanding the types of loans available and then selecting the option that fits your budget and needs. It also requires determining how much house you can afford and getting your finances in order.
Often the cost of real estate financing is greater than the original purchase price of a home (after including interest and closing costs). Because financing is so important, buyers should have as much information as possible about mortgage options and costs. Your Illinois REALTOR® can provide you with mortgage information, discuss financing options and recommend loan sources - and may be able to help you find financing that suits your needs.
Read on for five steps about the mortgage process to get you started.
1. Know Your Financing Options
A wide range of mortgage financing options can be obtained from mortgage bankers, mortgage brokers, mutual savings banks, commercial banks, credit unions and insurance companies. REALTORS can help you find responsible lenders that make fair and affordable loans.
In general, the mortgage you choose will be determined by:
Your down payment: Loans with low money down are available from some lenders. However, for down payments of less than 20%, lenders require mortgage insurance.
Your credit: The best rates and terms are available to those who have the best credit/credit scores. To qualify for the best loans, be sure to pay your credit cards, installment payments, rent and mortgage bills in full and on time.
"First-time" homebuyer status: First-time Illinois homebuyers (or those who have not owned a home in three years) may qualify for low-cost loans through the Partnership for HomeOwnership's Rural Initiative, Quincy Initiative and HomePower Mortgage Assistance programs. Learn more about these affordable mortgage programs from your Illinois REALTOR.
● Illinois mortgage programs
Types of loans include the following:
Conventional mortgages
A conventional loan is the most common type of mortgage. For down payments of less than 20%, a lender will require mortgage insurance on the loan. Mortgage insurance helps the lender recover some of the losses incurred in case you stop making payments on the loan. Private mortgage insurance adds a small cost to your financing, but it allows you to buy a house with a lower down payment. The lower the down payment is, the higher the mortgage insurance will be.
Fixed-rate mortgages
A fixed-rate mortgage maintains the same interest rate over the lifetime of the loan. Many consumers prefer this mortgage option for its stability in terms of budgeting and planning.
In addition to the typical 30 year mortgage, 25, 20 and 15 year mortgages also are available. The short-term loans call for higher payments, but with less interest than 30 year mortgages. Shorter loan terms will build equity more quickly which can be tapped for other financial needs. The 30 year fixed-rate mortgage is easiest to qualify for because the payments are lower. This should be considered in financial planning.
Adjustable-rate mortgages (ARMs)
ARMs work well for buyers planning to live in the home a short time, or whose income will continually rise and the interest deduction then becomes more important later. The ARM interest rate changes at pre-determined times throughout the life of the loan. As the interest rate changes, so does the mortgage payment. The interest rate could adjust every six months, once a year, or once every three, five or 10 years.
ARMs usually have two caps which restrict how much the interest rate index can fluctuate. One cap will limit how much the interest rate can increase from one adjustment period to the next, such as 2%. The second cap will limit the interest rate fluctuation for the duration of the loan. With a 6% lifetime rate cap, the highest interest rate can be no more than 6% above the original interest rate. Note: The FHA ARM has a 1% annual and a 5% lifetime cap, making it an attractive ARM.
Beware of ARM "payment caps" that limit how much the principal and interest payment can increase. Negative amortization can occur and the unpaid interest will be added to the loan balance.
ARMs may initially provide lower interest rates, therefore increasing the affordability of your desired home. But, before embarking on such a loan program, you must be certain you can manage sudden payment increases. Here are some questions to ask:
How long does the initial interest rate apply?
How frequently can the interest rate change?
How is the adjusted interest rate determined? (Generally, a specified amount - known as the "margin" - is added to a current published rate - known as the "index.")
How high can the interest go? (Remember, even small changes in your interest rate can affect your monthly payment significantly.)
Are there any limits on how much the interest rate can change each year?
Do the monthly payments still pay off the loan even if the interest rates increase? (With some loans, the amount you still owe - your "loan balance" - can increase rather than decrease each month. This is called negative amortization.)
Specialty mortgages
As conventional mortgage rates continue to fluctuate, some homebuyers turn to specialty mortgages to "stretch" their income in order to qualify for a larger loan. Like ARMs, specialty mortgages begin with a low introductory interest rate - a "teaser" - but the monthly mortgage payments are likely to increase a lot in the future. Common specialty mortgages include: interest-only, negative amortization, option payment ARM and 40-year mortgages.
It is in your best interest to learn the ins and outs of specialty loans which can pose greater risks to affording mortgage payments in the future. For more information, download Questions to Consider Before Choosing a Specialty Mortgage - a free brochure from the National Association of REALTORS.
Federally insured mortgages
In addition to conventional mortgages, one of the safest and most affordable types of mortgages is the Federal Housing Administration (FHA)-insured mortgage. The FHA mortgage insures homebuyers with less-than-perfect credit and offers low down payment options, a loan at reasonable cost and help with mortgage payments if needed. The USDA Rural Development and the Veterans Administration (VA) also provide insurance for home mortgage.
Seller financing
In some cases, a seller may provide financing. The rate of interest may be lower than conventional financing. Often, other contract terms are beneficial to both the buyer and the seller. Seller financing frequently occurs for speculative acreage transactions and rural properties. If the seller has a large equity position in the property, often he or she is willing to accept a contract for deed, as the IRS considers that transaction an installment loan, and the profit can be spread over the term of the contract. When mortgage money becomes tight, interest rates rise or home values drop, homeowners are more willing to accept a contract for deed to complete a sale.
Reverse mortgages
A reverse mortgage is a type of home equity loan that allows the owner to convert some of the equity in their home into cash while retaining home ownership. RMs work like traditional mortgages, only in reverse. Rather than make a payment to the lender, the lender pays the owner. Funds obtained from an RM may be used for any purpose, including expenses, such as taxes, insurance and maintenance.
To qualify, the borrower must own their home. The amount available will depend on the borrower's age, the equity in the home and the interest rate the lender charges. There are three RM plans available today: FHA insured, lender-insured and uninsured.
2. Applying for a mortgage
To obtain a home mortgage, you must complete a written loan application and provide supporting documentation.
Acceptable income for a mortgage application is considered to include:
- Full-time employment, two years tenure
- Part-time employment if steady for two years and expected to continue
- Overtime and bonus income that has occurred for two years and which will probably continue. (Lender will average.)
- Raises guaranteed to occur within 60 days of loan closing.
Other possible income can include:
- Retirement income
- Military income
- Veteran's benefits
- Social Security
- Alimony/child support
- Notes receivable
- Interest and dividend/trust income
- Unemployment benefits
- Rental income
- Auto allowance
Required documentation
During the prequalification procedure, the loan officer will describe the type of paperwork required. Specific documents include recent pay stubs, rental checks and tax returns for the past two or three years if you are self-employed. Following is a checklist of documents most lenders require in order to process your mortgage application. Documents required may vary by lender so be sure to follow your lender's instructions accurately. In addition, some fees associated with appraisals, credit reports and lenders may be required.
Buyers General Financial Information
W-2s, 1099s or 1040 tax returns for the past three years and recent pay stubs
Profit and Loss Statements (when self-employed) for current year and previous two years.
List of savings bonds, stocks or investments and their approximate market values. List of inheritances and their cash values.
List of account numbers, addresses, balances and past two months' statements of all open bank accounts.
List of account numbers, addresses, monthly payment and balances of all open and liability accounts (credit cards, personal and cosigned installment loans), and copies of the past two month's statements.
Copy of lease agreement(s) on rental property you own, mortgage held and notes due.
Verification of additional income (veteran's benefits, pension, social security, trust funds, disability, overtime bonus, commission, interest income, etc.)
Copies of alimony, child support and separate maintenance payments, with agreements, decrees and canceled checks.
Other Buyer Documentation
Copy of military orders, if applicable
Copies of titles to any motor vehicles or boats that are paid in full
Information about the Purchase
Signed copy of sales contract
Copy of canceled deposit check (earnest money) on house
Copy of gift letter, copy of gift check and copy of deposit slip for gift check (if money for downpayment is a gift from a relative)
3. Annual Percentage Rate
The Annual Percentage Rate (APR) is the ratio of the total finance charge compared to the total amount financed. For example, If your loan has a 10% APR, you'll pay $10 per $100 you borrow annually. The finance charge can include interest and various loan fees.
APR is one way to compare loans offered by different lenders. Although APR comparison is not completely accurate because lenders are not subject to clearly defined rules for calculating this number, it is a benchmark used by the U.S. Department of Housing and Urban Development to identify institutions that charge unreasonable fees.
APR calculations include a variety of fees, including:
Points - these are up-front fees where each point is equivalent to 1% of the loan amount.
Other fees - such as a loan processing fee, document preparation fee, pre-paid interest (paid from the closing date to the end of the month), underwriting fee, appraisal fee, credit report fee, attorney fees, filing fees and private mortgage insurance.
Consumers should not use APRs to compare a 30 year loan to a 15 year loan. APR also should not be used to indicate the true cost of an adjustable rate loan as it does not indicate the interest rate adjustments or the period of time the rate is locked.
A good way to compare loans of the same type of program is to request a good-faith estimate from different lenders at the same interest rate. Then, subtract all fees that are unrelated to the loan - such as attorney fees - and add up all the loan fees. The lower the loan fees, the cheaper the loan.
4. Closing costs
Closing, or settlement, is the formal process of transferring the property title from the seller to the buyer. When you apply for a loan, the lender will give you an estimate of closing costs. Closing costs will vary by lender and by area and may include:
Application Fee: The fee you paid at the time of the loan application to cover your appraisal and credit report; will appear on your closing statement as a pre-paid fee.
Origination Fee: Your lender may charge a fee to cover the administrative cost of processing your loan. This fee is usually a small percentage of the loan amount.
Items Paid in Advance (Prepaid Escrows): Most lenders require you to pay in advance for some items that will be due one year after closing. These pre-paid items usually include first-year hazard insurance premium and two months of mortgage insurance and real estate taxes. However, you will get credit for last year's taxes up to closing.
Title Insurance Charges: Insurance policy that ensures against losses. This also includes protection against unrecorded easements or liens.
Recording and Transfer Fee: A record of your home purchase will be on file with your local government, and there will be a fee to record the various forms.
Attorney's Fee: This fee is to pay your attorney for preparing and reviewing all of the documents needed to close your loan.
Document Preparation Fee: This fee covers the cost of the bank to prepare and close your loan.
You can expect to pay closing costs from 3% to 4% of the amount of your mortgage loan.
Most closing costs are either tax deductible or should be capitalized and added to the purchase price of your home when you are ready to sell.
Deductible costs for buyers include:
Points (interest collected in advance by the lender)
Interest paid from the closing date to the first payment
Property taxes
Deductible costs for sellers include:
Credits to the buyer for taxes already paid
Mortgage interest for the selling year
Capitalized fees include:
Recording fees
Title fees
Attorney fees
Notary fees
Termite inspection fees
For more information, consult your tax advisor.
5. Know the Breakdown of a mortgage payment
When you make a mortgage payment, exactly what are you paying? You are probably familiar with principal and interest, which are the major parts of your mortgage payment. Here is a breakdown of all the costs included in your mortgage payment.
Principal - The amount of money you borrowed. Each month when you make your mortgage payment, you are paying back a small portion of principal. The longer you make payments, the more of your payment goes to reduce the principal you owe. Over time, interest will become a smaller part of your monthly payment.
Interest - The cost of borrowing money, usually expressed as an annual percentage of the loan amount, for example 7.5%, 8%, etc. Your lender will give you an "end of the year" summary showing the interest you paid. That interest is a straight deduction from your income prior to calculating the payment of your Federal taxes.
Property Taxes - Taxes paid to local governments, usually charged as a percentage of the property value. Your lender collects the taxes through your monthly payments. The amount of tax will vary depending on where you live. Your real estate taxes are deductible on your Federal income tax return.
Hazard Insurance - An insurance policy that protects you from any financial losses on your property that might result because of fire, flood or other "hazards." Before you buy, compare companies and policies. Often, new construction has lower premiums. Initially, "safety" devices can also reduce the premium.
Mortgage Insurance - An insurance policy that helps mortgage lenders recover some of the losses incurred if a borrower fails to fully repay a loan. Mortgage insurance makes it possible to buy a home with a low down payment. This amount is reduced with higher down payment.
Lenders often refer to principal, interest, taxes and insurance as the acronym PITI. Generally, the PITI is the amount you will pay each month for your mortgage.
This time may be your best opportunity market in years. Mortgage interest rates are low and prices in Illinois are still holding strong. Over time no investment comes close to real estate so now is a great time to buy, sell or invest.
All real estate is local. What's happening in your local market is all that matters. Ask your local REALTOR what's going on in your market. They are the experts in pricing, buying and selling patterns, and demand.
Don't be scared off by stories about a "credit crunch." Conventional loans are available for credit-worthy buyers seeking these types of mortgages. And mortgage interest rates remain at historically low levels.
Is it a good time to buy?
People will always need to buy or sell a home whether a move is job-related or you are ready to downsize or expand.
The national housing market has received a lot of negative press lately with stories of mortgage market tightening and increasing foreclosures. But for the average person with good credit, traditional financing is readily available.
It's important to do some homework before you buy to see what you can afford and what your financing options are. Today, mortgage interest rates are well below their all-time high of over 18 percent in the 1980s. People bought homes then and they can buy them now.
Housing is your best long-term investment
Homeowners who are in it for the long-term are coming out well ahead. Here's why. Because of the power of leveraging, a $10,000 down payment on a typically priced home in the United States at a typical home price appreciation of 5 percent will return $110,000 after 10 years. The same $10,000 invested in the stock market appreciating at 10 percent annual increases will result in $23,600.
Source: National Association of REALTORS®
Why wait? It's a good time to buy and grab your piece of the American Dream.
NEWS UPDATE: FHA loan limit increases to help homebuyers in Illinois.
As part of the President's recently signed economic stimulus package, loan limits have increased for Federal Housing Authority (FHA) mortgage loans as well as conforming loans from Fannie Mae and Freddie Mac. NAR research finds that increasing FHA loan limits will help an additional 138,000 Americans achieve the dream of homeownership and will allow nearly 200,000 homeowners to refinance and potentially keep their home. REALTORS also believe that increasing the loan limits for Fannie Mae and Freddie Mac will bolster the housing finance market. Learn more by contacting an Illinois REALTOR or visit HUD.
8 Signs You're Ready To Buy Your First Home
With home prices cooling off and apartment rents heating up, is now the time to buy your own place? Here are the ways to know when it makes sense financially to purchase your first home. By Erin Burt, Kiplinger's
The squeeze is on for renters. Apartment rents are expected to rise 5.3% this year, according to the National Association of Realtors. That's about double last year's increase, and it's the highest jump since 2000. Until now, rents have seen slow growth over the past few years as the booming real estate market has lured away renters into homeownership.
But that's starting to change. Interest rates are rising and home price appreciation is slowing, so fewer buyers are looking for new homes. That gives landlords the upper hand to raise rents. Meanwhile, the real estate market is starting to turn from the seller's favor toward the buyer's. So if you're a renter who has been dreaming of homeownership, is now a good time to take the leap?
Sure, a cooling real estate market is good news for buyers because it's easier for them to negotiate a deal. But it shouldn't be the main reason that pushes you into your first home. In fact, buying your first home is a personal decision that you should make independent of what the market may or may not be doing.
"Time means nothing," says Michael Eisenberg, a CPA and financial planning specialist in West Los Angeles. You can't predict what will happen to home prices in your neighborhood in the next few months, let alone the next few years. But if you're looking to make the long-term commitment of homeownership, it helps to approach the decision like you would any business decision. You don't want to buy on emotion, or because everyone else is doing it. "This is the biggest financial move a young person may ever make," Eisenberg says. "You should make the investment because it makes sense for your finances. You buy when you're ready."
So how, exactly, do you know when your finances are ready? We provide a checklist of eight things first-time home buyers should have squared away before they consider a purchase -- no matter where analysts say home prices are heading.
You are ready to buy when …
No. 1: You have a budget -- and you know how to use it
Owning your own place comes with a slew of new expenses, so good money management skills are a must-have. If you don't have a household budget right now, start one. (See "Build your budget" and "A simpler way to save: The 60% solution" to learn how.) You need to know where you are financially -- where your money is coming from and where it goes every month -- to know exactly how much you can afford to spend on a new home.
Once you have your current finances sorted out, draw up a mock budget for homeownership. Find out how much homes cost in your area and how much your mortgage payment will run. Then, factor in higher utility bills, homeowner's insurance, property taxes, homeowners association fees, and maintenance and upkeep costs, as well as higher commuting costs if you're considering a neighborhood further from work. If you simply cannot afford the increased expenses that come with a house, it's never a good time to buy -- no matter what's happening in the real estate market.
No. 2: You have a sizeable down payment
Traditionally, to get your foot in the door, you'll need a down payment worth 20% of the home price. That means for a $250,000 home, you'll need $50,000 upfront. Sure, there are ways to get around that steep requirement with zero- or low-down loans, but those options will cost you. You may have to pay extra for private mortgage insurance or take out a piggyback loan with a much higher interest rate. With the slowing housing market, having that 20% down payment becomes even more important because you'll start off with some equity in case you have to move earlier than expected. "In the early years, you aren't building any equity with the mortgage payment," says Eisenberg. "If the market changes or your personal circumstances change and you're forced to sell, you could lose money" if you made little or no down payment. The equity in your home can also give you an extra source of cash in an emergency. (See "Why you need a home down payment" to learn more.)
And the money down is only the beginning. Don't forget to factor in closing costs (3% to 6% of the purchase price) property taxes, initial repairs, moving expenses and decorating costs.
No. 3: You have a reliable source of income
Buying a home is a long-term financial commitment, so you'll need consistent cash flow to cover those monthly payments -- not to mention the little extra expenses that come with homeownership. If you're in school, plan to go back to school, have a less-than-reliable job or plan to start a family, you need to take a good look at your future cash-flow abilities. Will you be able to make your mortgage payment six months from now? How about six years from now? "Some couples can afford the house when they're both working, but if a kid comes along and one wants to stop working, then they have a problem," says Eisenberg.
No. 4: You have an emergency savings fund
If you have enough cash on hand to cover three to six months of your living expenses, you're one step closer to being prepared for homeownership. Just in case something happens to disrupt your steady income -- say a serious illness, unexpected layoff or even a natural disaster that prevents you from working -- you want to make sure you can still afford to make your mortgage payments until you can get out of your rough patch, says Bob Baldwin, a CPA in Charleston, S.C. Learn more about how and where to build your emergency stash.
No. 5: You have your debts under control
Call 'em crazy, but lenders like to make sure you'll have enough money each month to pay your obligations. So before they'll give you a mortgage, they take a look at your so-called debt-to-income ratio. Generally speaking, they want to make sure your monthly housing costs -- including principal, interest, taxes and insurance -- will consume no more than 33% of your monthly gross income; and that your total debt payments, including your mortgage, credit cards, student loans and auto loans, will remain below 38% of your total pay. So if you have large outstanding debts, it's a good idea to try to pay them down before applying for a mortgage to make sure you can qualify for as much money as you'll need. This also means you should avoid taking on any substantial new debt six months to one year prior to your purchase, or you may throw your ratio off. So, it may be best to drive that clunker for a little while longer, or put off charging that European vacation. Find out here how much you can qualify to borrow.
No. 6: Your credit report is in good shape
Nowadays you don't have to have perfect credit to become a homeowner, but a decent history can help you get a lower interest rate on your mortgage and a lower monthly payment. The government allows you to check your credit history free once a year from each of the three main credit bureaus at AnnualCreditReport.com. So take a peek to find out what lenders see about you. If you see any errors, correct them now. If you see room for improvement, find out how you can boost your score.
"Don't be sloppy the year or two before you buy the house," says Baldwin. You don't want any missed payments or other black marks that could lower your estimation in the eyes of lenders.
Having bad credit, however, may not be your biggest concern. If you're just starting out, you need to make sure you have a credit history. If you hold a credit card or took out student loans, you're probably covered. If not, find out how you can build a stellar credit history from scratch, preferably one year or more before you plan to buy.
No. 7: You can make a long-term commitment
Are you ready to stay put for at least three to five years? Typically, that's how long you'll have to keep the house in order to recoup your buying and selling costs. If you sell before then, you may lose money on the deal. And if you do turn a profit, you'll have to pay capital gains taxes if you lived in the house less than two years. The length of your stay becomes even more important now that home appreciation is beginning to slow from its previous pace. If you don't think you'd stay put for that long, you may be better off renting.
Don't fret: Renting can actually make better financial sense for some people at different times in their lives, says Eisenberg. If you think you may get a job transfer, go back to school or otherwise need to move within the next five years, renting gives you the flexibility you need and could possibly save you money.
Want to find out if renting or buying makes the most sense for you? Our calculator will crunch the numbers to help you decide. In the slot for "appreciation rate," assume your home will appreciate at the rate of inflation or a little more, just to be safe. Right now, that's around 3% to 4% annually.
No. 8: You are prepared to become your own landlord
Even if you can afford homeownership, don't buy simply because you can. You need to make sure you're ready to live the lifestyle. Owning a place comes with a fair share of new responsibilities, headaches and costs -- not the least of which is becoming your own landlord. When you rent an apartment, you simply call the landlord if something breaks. With your own home, if it's broke, you fix it -- or you'll have to pay someone else to fix it. You're also responsible for upkeep, including yard work and shoveling snow (unless, of course, you buy a condo without a yard). Will you have the time, energy or desire to maintain the property? How about the money for all those little extras, such as buying your own lawn mower and hiring the occasional plumber? Make sure you know what you're getting into.
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Al Aronow
Libertyville,
IL
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Address: 1344 S. Milwaukee Ave., Libertyville, IL, 60048
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