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Objective 2.03 Analyze financial and legal aspects of home ownership

Learn about mortgages, down payments, qualifying for a loan, and the purchasing process to make an informed decision about buying a home. Understand the advantages and disadvantages of home ownership.

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Objective 2.03 Analyze financial and legal aspects of home ownership

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  1. Objective 2.03Analyze financial and legal aspects of home ownership

  2. So you want to buy a house… • In order to buy a home most people will need to borrow money. This is called a mortgage • A mortgage is a contract outlining the terms of a loan between the lender and the borrower.

  3. Fixed Rate Mortgages(interest rate and monthly payment are constant) • Conventional: borrower pays a fixed interest rate for the length of the loan • FHA-insured: guarantees mortgages made by the bank to people with low-medium credit • FHA = Federal Housing Administration • VA loan: buyers who serve or have served in the military may qualify for a loan guaranteed by the Veterans Administration • Terms of Loans: loans are repaid monthly over a term of 15-30 years.

  4. Estimating What You Can Afford • Multiply two-and-one-half times your annual gross income (income before deductions) • Gross income X 2.5 = price of house you can afford • Buyers must also have a down payment of at least 5%. This is a part of the purchase price that must be paid in cash!

  5. Down Payment Calculation • Example: $72,000 with 10% down payment • Cost of house = $72,000.00 • 10% down payment = $7200 • Amount to finance = $64,800 • Example: $72,000 with 20% down payment • Cost of house = $72,000.00 • 20% down payment = $14,400.00 • Amount to finance = $57,600.00 • Larger the down payment, the smaller the mortgage!

  6. Qualifying for a Loan • Housing to Income Ratio: ALL of your housing costs should equal no more than 28% of your gross monthly income. • Includes mortgage payment, property taxes, insurance, utilities, repairs, maintenance • Debt to Income Ratio: Monthly housing costs plus other long-term debts should total no more than 36% of your gross monthly income. • Long-term debts are those that take longer than 10 months to repay • BOTH ratios must be met to qualify for a loan!

  7. Stop here

  8. The Purchasing Process • Agreement of sale: • Also called a purchase agreement, sales agreement, or contract of purchase • Legal agreement between the seller and the buyer • States all the conditions of the sale.

  9. Earnest Money: • Money a potential buyer pays to show that they are serious about buying a home • Money is held and applied to the cost of the house or refunded if the buyer cannot get a loan.

  10. Abstract of title: • Also called a title search • A search of public records to make sure the seller is the true owner of the house • Makes sure there are no debts on the house • Survey: • Makes sure property lines are accurate.

  11. Inspections: • General home inspection (roof, heating and cooling systems, structural problems, safety issues) • Termite inspection • Secure a mortgage • Now, most buyers will become pre-approved for a mortgage.

  12. Closing: • Closing is when the buyer takes ownership of the property • It involves the seller, the buyer, lawyers, and real estate agents • Closing costs are paid. This is cash paid by the buyer to cover the legal and financial costs of purchasing a home.

  13. Closing costs can include: • Origination fees: fee paid to the lender for processing the loan; usually 1% of mortgage • Appraisal fee: fee paid for determining the value of the property • Other fees for lawyers, real estate agents, etc. Some of the money will be held in escrow - money held in trust by a third party until a specified time - usually for property taxes and insurance.

  14. Advantages of Owning a Home • Sense of freedom and independence • Financial advantages: • Helps establish a good credit record in order to qualify for future loans • Interest and property taxes are deductible • Houses usually increase in value – this is called equity.

  15. Equity Example • Mary owns a house. She currently owes $90,000 on her mortgage. She has decided to sell her house and buy a new one • Mary’s real estate agent sells Mary’s house for $140,000 (market value) • Mary paid off her mortgage of $90,000 • How much money did Mary make when she sold her house? • Mary made$50,000. This is called equity. • Mary used her equity as a down payment on a new home.

  16. Disadvantages of Owning a Home • Strain on finances- property taxes, insurance, and maintenance • Uses up lots of your free time • Foreclosure if you get behind on monthly payments • Limited mobility.

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