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Frequently
Asked Questions
Buying
a Home - Q & A
What You Can Afford
Q: How do you find out the value of a troubled property?
A:
Buyers considering a foreclosure property should obtain as much
information as possible from the lender about the range of bids
being sought.
It also is
important to examine the property. If you are unable to get into
a foreclosure property, check with surrounding neighbors about
the property's condition.
It also is
possible to do your own cost comparison through researching comparable
properties recorded at local county recorder's and assessor's
offices, or through Internet sites specializing in property records.
Q: Why buy
a house?
A: Here
are some frequently cited reasons for buying a house:
- You need
a tax break. The mortgage interest deduction can make home ownership
very appealing.
- You are
not counting on price appreciation in the short term.
- You can
afford the monthly payments.
- You plan
to stay in the house long enough for the appreciation to cover
your transaction costs. The costs of buying and selling a home
include real estate commissions, lender fees and closing costs
that can amount to more than 10 percent of the sales price.
- You prefer
to be an owner rather than a renter.
- You can
handle the maintenance expenses and headaches.
- You are
not greatly concerned by dips in home values.
Q: What can
I afford?
A: Know
what you can afford is the first rule of home buying, and that
depends on how much income and how much debt you have. In general,
lenders don't want borrowers to spend more than 28 percent of
their gross income per month on a mortgage payment or more than
36 percent on debts.
It pays to
check with several lenders before you start searching for a home.
Most will be happy to roughly calculate what you can afford and
prequalify you for a loan.
The price
you can afford to pay for a home will depend on six factors:
- gross
income
- the amount
of cash you have available for the down payment, closing costs
and cash reserves required by the lender
- your outstanding
debts
- your credit
history
- the type
of mortgage you select
- current
interest rates
Another number
lenders use to evaluate how much you can afford is the housing
expense-to-income ratio. It is determined by calculating your
projected monthly housing expense, which consists of the principal
and interest payment on your new home loan, property taxes and
hazard insurance (or PITI as it is known). If you have to pay
monthly homeowners association dues and/or private mortgage insurance,
this also will be added to your PITI.
This ratio
should fall between 28 to 33 percent, although some lenders will
go higher under certain circumstances. Your total debt-to-income
ratio should be in the 34 to 38 percent range.
Q: How much
will I spend on maintenance expenses?
A: Experts
generally agree that you can plan on annually spend 1 percent
of the purchase price of your house on repairing gutters, caulking
windows, sealing your driveway and the myriad other maintenance
chores that come with the privilege of homeownership. Newer homes
will cost less to maintain than older homes. It also depends on
how well the house has been maintained over the years.
Q: Where
do I get information on housing market stats?
A:
A real estate agent is a good source for finding out the status
of the local housing market. So is your statewide association
of Realtors, most of which are continuously compiling such statistics
from local real estate boards.
For overall
housing statistics, U.S. Housing Markets regularly publishes quarterly
reports on home building and home buying. Your local builders
association probably gets this report. If not, the housing research
firm is located in Canton, Mich.; call (800) 755-6269 for information;
the firm also maintains an Internet site. Finally, check with
the U.S. Bureau of the Census in Washington, D.C.; (301) 495-4700.
The census bureau also maintains a site on the Internet. The Chicago
Title company also has published a pamphlet, "Who's Buying
Homes in America." Write Chicago Title and Trust Family of
Title Insurers, 171 North Clark St., Chicago, IL 60601-3294.
Q: What is
the standard debt-to-income ratio?
A:
A standard ratio used by lenders limits the mortgage payment to
28 percent of the borrower's gross income and the mortgage payment,
combined with all other debts, to 36 percent of the total.
The fact that
some loan applicants are accustomed to spending 40 percent of
their monthly income on rent -- and still promptly make the payment
each time -- has prompted some lenders to broaden their acceptable
mortgage payment amount when considered as a percentage of the
applicant's income.
Other real
estate experts tell borrowers facing rejection to compensate for
negative factors by saving up a larger down payment. Mortgage
loans requiring little or no outside documentation often can be
obtained with down payments of 25 percent or more of the purchase
price.
Q: How long
do bankruptcies and foreclosures stay on a credit report?
A: Bankruptcies
and foreclosures can remain on a credit report for seven to 10
years.
Some lenders
will consider an borrower earlier if they have reestablished good
credit. The circumstances surrounding the bankruptcy can also
influence a lender's decision. For example, if you went through
a bankruptcy because your employer had financial difficulties,
a lender may be more sympathetic. If, however, you went through
bankruptcy because you overextended personal credit lines and
lived beyond your means, the lender probably will be less inclined
to be flexible.
Q: What is
Fannie Mae's low-down program?
A: Fannie
Mae is expanding the availability of low-down-payment loans in
an effort to help more people nationwide qualify for a mortgage.
Two new programs
will help potential buyers overcome two of the most common obstacles
to home ownership, low savings and a modest income.
To address
many first-time buyers' struggles to save the down payment, Fannie
Mae developed Fannie 97. The program provides 97 percent financing
on a fixed-rate mortgage with either a 25- or 30-year loan term
through Fannie Mae's Community Home Buyers Program.
Fannie Mae's
new Startup Mortgage will assist buyers with a 5 percent down
payment who are at any income level. Yet applicants do not need
as much income to qualify and less cash for closing than with
traditional mortgages. Borrowers will receive a 30-year, fixed-rate
mortgage with a first-year monthly payment that is lower than
the standard fixed-rate loan.
Freddie Mac,
Fannie Mae's counterpart, also offers low-down-payment loan programs.
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