HOME BUYING
It is not hard to do

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Owning a home is one of the most rewarding purchases in life to go through. People are often intimidated of purchasing a home, and instead often-waste money by renting property, that have no equity to give in return. Home buying can be a clear-cut experience, by using precise financial planning, helpful real estate agents, and knowledge of what to look for in a home. Creating a realistic budget is a great first step towards buying a home. Many homebuyers and even homeowners make the oversight of not living on a budget. There are many financial obligations that come with home ownership such as mortgage payment, taxes, homeowner’s insurance, electric, gas, sewage and water. These are all bills on top of personal finances that are necessary and must be created into the budget. When setting out to buy a home there will come into question about what is affordable and where should the price range be. There is an old school rule of thumb to give an idea of what is in the buyer’s price range, and that is to multiply the yearly gross salary of the buyer by two and a half times. That will provide a general guideline in terms of what can be afforded.
The method used today by real estate agents is complied from credit scores and debt-to- income ratios. A debt-to-income ratio is a comparison between the amounts of money earned each month, and the amount spent on various debts. These ratios use gross monthly income, which is the amount earned before taxes are taken out. As Cornett (2011) explains, “personal debts can only consume a certain amount of gross monthly income. There are actually two types of debt-to-income ratios used by lenders; for example, a lender might allow debt ratios of "28/36." The front ratio is 28, which means that the monthly mortgage payment cannot account

for more than 28 percent of the gross monthly income. The back ratio is 36, which means that the combined debts (mortgage, credit cards, car loan, etc.) cannot exceed 36 percent of a monthly income.” These figures are only a reference and give an idea at what lenders look for, so it is a good idea to have any outstanding debt paid off before purchasing a home. There are different calculators that can provide ballpark assessments for financials, web sites provide mortgage rate calculators. The easiest thing is to be pre-approved from a lender; this will be the best source to determine the possible loan amount for a mortgage. Pre-approval uses three pieces of criteria to determine the amount and that is based on debt, credit and income history. Once the amount afforded has been established it is an enormous advantage to start loading up the savings account or create another one for the “housing funds” to reflect at least two, preferably three months worth of mortgage payments and an additional 15% per month to cover other expenses. On top of the payments money should be put away to provide a down payment. Some ideas to consider are storing all of the tax return payment, state and federal into the savings account, this can be the best source of income because it shows the biggest return in one lump sum. Some other ways to save include switching to transfer high interest rate credit cards to lower rate or cards with zero percent for extended periods. Reducing cell phone features, switching to lower cable and home phone programs, as well as selecting cheaper car insurance are all great ways to save extra money. If time and life permit, getting a part-time job is another noteworthy way to add income fast to the housing fund.

The more money saved in the housing fund the more that can be applied to the down payment. The higher the down payment provided the less of a monthly mortgage payment and possible reduction in interest rate. The amount desired for a down payment when purchasing a home is 20%. This amount is most of the time an unrealistic desire, a $400,000 home would require a down payment of $80,000. If the funds are there life is great, there are certain loans that if qualified only require 3.5%. The same home would now only require $14,000 for a down payment a much more manageable number. One thing to point out about down payments is that any down payment less than 20% will be subject to PMI; this is called private mortgage insurance. “A conventional mortgage is one that is not insured or guaranteed by the government. Conventional loans with a down payment of less than 20% typically require private mortgage insurance (PMI), which protects the lender if the homeowner defaults on the loan” Mortgage basics (2008).
Once the down payment is at a substantial amount, shopping for a type of loan becomes the next task. There are quite a few of home loan types out there today, and this paper will cover some of the more popular ones. Interest rate selection is also a consideration when shopping for a loan. There are two common used terms: fixed rate and ARM (Adjustable Rate Mortgage), one of these will be applied to the specific loan as the form of interest for the loan payment. Both of theses have advantages and disadvantages and the more they are understood, the better for any potential buyer.
Fixed rate are exactly just that, it is a rate that never changes for the applied life of the loan. If the buyer has a fixed rate of 5% on a 30-year loan, every payment for 360 months will have the 5% interest rate applied to the payment. This type of rate creates a more stable, affordable loan and if the rates go lower, an application for a refinance loan can be filled out and submitted for the lower fixed rate.
Adjustable rates are rates that come with short-term contracts. They can vary anywhere between 3, 5, 7, and even 10 years. Cornett (2011) points out that, “Overall, the interest rate on this type of home loan is lower than a traditional fixed-rate mortgage. The downside is that the interest rate can never be predicted it will adjust to after the introductory period. So in this regard, the initial period can be thought of as a reward for the uncertainty of the adjustable period. Adjustable rates start with a lower interest rate than a regular fixed-rate loan, but have the uncertainty of the adjustment phase.
During the adjustable phase of the mortgage, the monthly payments will rise and fall with average interest rates. It would be great if they fell, but bad if they rose. The important thing to remember is that there is no way to predict the average interest rates in advance, so the adjustable nature of the loan is something of a gamble.” A bad example of this happened during the economic housing crisis in 2008-2010. Homeowners were coming to the end of the introductory period and could not refinance the loans, which resulted in payments with interest rates as high as 15%, which could bump mortgage payments anywhere from $1,000 to $3,000 more a month. If not planning on staying in the home for a long period of time and fixed rates are above 6-7% then it could be a good idea to try the ARM. It is a risk, and as long as the house can be sold or refinanced before the end of the period, it will be a risk worth taken in the end.
Mortgage loans are loans that are taking out and repaid for the purchase of a home. It is the difference between the cost of the home and the supplied down payment. Some of the more popular, basic loan types are conventional loans, FHA loans, and VA loans. Each individual type of loan offers some type of advantage. The trade off for these is there are certain requirements such as down payment, income, financial and military service.
Conventional loans are the most common type of loan available these are not insured by any type of government agency. The requirement for this type of loan is a down payment of 20% of the price the home is purchased. For example, if a home is purchased for $250,000 the down payment required is $50,000. If more than the required down payment is put down, the monthly mortgage payment becomes cheaper, there are no limits to how much can be put down.
FHA loans are loans that are funded through the Federal Housing Authority or FHA. Mortgage Basics (2008) points out “the FHA operates several low down payment mortgage insurance programs that can be used to purchase a home. FHA-insured loans generally require a three percent cash contribution to the down payment and closing costs.” These loans allow homes to be purchased with a much lower down payment than conventional loans. Since these loans require little down, they are subject to PMI insurance payments. The insurance protects the lending institution in the event there is a default on the loan at any time within the terms of agreement in the contract.
Veteran Affair loans or VA loans are loans issued to veterans of military service and active duty members also. Veterans interested in this type of loan only have one requirement, a honorable discharge from the enlisted branch of service. The biggest benefit of this loan is a home can be purchased with zero down. Another big enough advantage is no PMI insurance needs to be purchased for this type of loan either. Rivera (n.d) points out “While there are some conventional no down-payment home loan programs on the market, it will cost a higher interest rate for the privilege, not so with a VA loan, the same market rate applies whether there is a 10% down-payment or zero down-payment. In addition, most will find that in some cases the VA interest rate is comparable with or even lower than conventional loan rates.
Another great benefit of the VA home loan program involves the loan closing cost. While VA loans do not require a down payment, there is still loan closing cost as with any home loan program that the borrower incurs. Closing cost usually average 3-5% of the loan amount. These costs are paid by the seller up to 6%.”

AGENTS

References
Cornett, B. (2011). “How to qualify for a mortgage loan in 2011” HomeBuyingInstitute.com
Retrieved February 9, 2011, from http://www.homebuyinginstitute.com/debt_ratio
Cornett, B. (2011). “Types of home loans - a buyer's guide to mortgage loans” HomeBuyingInstitute.com. Retrieved February 14, 2011 from http://www.homebuyinginstitute.com/mortgagetypes_rates
Mortgage basics. (2008). Toledo Business Journal, 24(7), 45. Retrieved from EBSCOhost.
Rivera, L. (n.d). “VA home loan program for military veterans” HomeBuyingInstitiute.com Retrieved February 14, 2011, from http://www.homebuyinginstitute.com/VA_mortages