As a "rule of thumb" you can afford to buy a home equal in price to twice your gross annual income. More precisely, the price you can afford to pay for a home will depend on six factors:
Lenders will analyze your income in relation to your projected cost of the home and outstanding debts. This will determine the size loan you can borrow. Your housing expense-to-income ratio is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your loan, property taxes and hazard insurance. The sum of these costs is referred to as "PITI."
Monthly homeowner association dues, if you're purchasing a condominium or townhouse, and private mortgage insurance are added to the PITI. Your housing income-to-expense ratio should fall in the 28 to 33 percent range. 28 percent of your gross monthly income is allotted toward PITI. 33 percent of you gross monthly income is allowed for PITI and all long term debt. Some lenders will go higher under certain circumstances.. Your total income-to-debt ratio should not exceed 34 to 38 percent of your gross income.
First and foremost it is strongly recommended that you hire a professional person to inspect the home. Many inspectors belong to the American Society of Home Inspectors (ASHI). They attend seminars and stay abreast of the latest developments.
The form also asks sellers to note the presence of environmental hazards, walls or fences shared with adjoining landowners, any encroachment of easements, room additions or repairs made without the necessary permits or not in compliance with building codes, zoning violations, citations against the property and lawsuits against the seller affecting the property.
Also look for settling, sliding or soil problems, flooding or drainage problems.
People buying a condominium must be told about covenants, codes and restrictions or other deed restrictions, if the homeowners association has any authority over the subject property and ownership of common areas with others. Be sure to ask questions about anything that remains unclear or does not seem to be properly addressed by the forms provided to you.
There are always some sellers who for some reason must sell quickly, however in general, a very low offer in a normal market might be rejected immediately. In a strong buyer's market, the below-market offer will usually either be accepted or generate a counteroffer. If few offers are being made, an outright rejection of offers becomes unlikely. In a strong seller's market, offers are often higher than full price. While it is true that offers at or above full price are more likely to be accepted by the seller, there are other considerations involved:
1. Is the offer contingent upon anything, such as the sale of the buyer's current house? If so, such an offer, even at full price, may not be as attractive as an offer without that condition.
2. Is the offer made on the house "as is," or does the buyer want the seller to make some repairs before the close of escrow or make a price concession instead?
3. Is the offer all cash, meaning the buyer has waived the financing contingency? If so, then an offer at less than the asking price may be more attractive to the seller than a full-price offer with a financing contingency.
4. Are there any requests for seller concessions, such as asking the seller to contribute towards points and/or closing costs? If so, the offer is not really full price.
Different sellers price houses very differently. Some deliberately overprice, others ask for pretty close to what they hope to get and a few (maybe the cleverest) underprice their houses in the hope that potential buyers will compete and overbid. A seller's advertised price should be treated only as a rough estimate of what they would like to receive.
If possible try to learn about the seller's motivation. For example, a lower price with a speedy escrow may be more acceptable to someone who must move quickly due to a job transfer. People going through a divorce or are eager to move into another home are frequently more receptive to lower offers.
Some buyers believe in making deliberate low-ball offers. While any offer can be presented to the seller, a low-ball offer often sours a prospective sale and discourages the seller from negotiating at all. And unless the house is extremely overpriced, the offer probably will be rejected anyway.
Before making an offer, also investigate how much comparable homes have sold for in the area so that you can determine whether the home is priced right.
Various types of loan programs exist. Some require a minimum of 3 percent down payment (FHA Loans) or 5 percent on conventional loans. Veterans can purchase with no money down (VA Loan).
Putting down as little as possible allows buyers to take full advantage of the tax benefits of home ownership. Mortgage interest and property taxes are fully deductible from state and federal income taxes. Buyers using a small down payment also have a reserve for making unexpected improvements. It may be more prudent to make a larger down payment and thereby reduce the amount of debt that must be financed. Once a buyer puts twenty percent or more as a down payment on their desired home, they will waive the requirement for mortgage insurance.
Mortgage insurance is a requirement on all loans, with the exception of veterans guaranteed loans. That means a full years premium for the insurance is collected "up front' at the closing of escrow, plus you will be paying monthly as part of your PITI, principle-interest-taxes-insurance.
Title insurance is a form of insurance in favor of an owner, lessee, mortgage or other holder of an estate lien, or other interest in real property. It indemnifies against loss up to the face amount of the policy, suffered by reason of title being vested otherwise than as stated, or because of defects in the title, liens and encumbrances not set forth or otherwise specifically excluded in the policy, whether or not in the public land records, and other matters included within the policy form, such as lack of access to the property, loss due to unmarketability of title, etc. The title policy form sets forth the specific risks insured against. Additional coverage of related risks may also be added by endorsements to the policy or by the inclusion of additional affirmation insurance to modify or supersede the impact of certain exceptions, exclusions or printed policy "conditions." The policy also protects the insured for liability on various warranties of title.
In addition, the policy provides protection in an unlimited amount against costs and expenses incurred in defending the insured estate or interest.
Before it issues a title policy, the title insurance company performs, or has performed for it, an extensive search, examination and interpretation of the legal effect of all relevant public records to determine the existence of possible rights, claims, liens or encumbrance that affect the property.
However, even the most comprehensive title examination, made by the most highly skilled attorney or lay expert, can not protect against all title defects and claims. These are commonly referred to as the "hidden risks." The most common examples of these hidden risks are fraud, forgery, alteration of documents, impersonation, secret marital status, incapacity of parties (whether they be individuals, corporations, trusts or any other type), and inadequate or lack of powers of REALTORS® or fiduciaries. Some other hidden risks include various laws and regulations that create or permit interests, claims and liens without requiring that they first be filed or recorded in some form so that the potential buyers and lenders can find them before parting with their money.
It is strongly recommended that home buyers are prequalified or pre-approved for a loan as their first step in the process. By being prequalified, a buyer knows exactly how much house they can afford. They can make more informed decisions in the market place. This does not mean they will definitely get the loan because their credit reports, wages and bank statements still need to be verified before you can receive a commitment from the lender for the loan.
Almost all mortgage lenders prequalify people at no charge. Many of them will even do it on the internet. In order to be pre-approved, an application will be taken. For a fee, your credit report will be pulled, your employment and income will be verified, your checking and savings accounts will also be verified. In other words, all the necessary documentation will be completed in order for you to obtain a loan. The only things remaining will be for you to find a home, obtain an appraisal on it to prove its value to the bank and perform whatever inspections you may want on the property. This process considerably shortens the time frame to closing.
Compare the mortgage charts published in most newspapers.
Occasionally some lenders are willing to negotiate on both the loan rate and the number of points. This isn't typical among many of the established lenders who set their rates. Nevertheless, it never hurts to shop around, know the market and try to get the best deal.
The interest rate is much more open to negotiation on purchases that involve seller financing. Generally, these are based on market rates but some flexibility exists when negotiating such a deal.
Sales price increases in either type of housing are strongly tied to location, growth in the local housing market and the state of the overall economy.
Some people feel that buying into a new-home community is a bit riskier than purchasing a house in an established neighborhood. Future appreciation in value in either case depends upon many of the same factors. Others believe that a new home is less risky because things won't "wear out" and need replacement.
"Existing homes have been appreciating a little more than new homes but every once in awhile they're at the same level and sometimes the new home prices go up a little quicker" according to the National Association of REALTORS® (NAR).
NAR figures show the median price of existing homes went up 3 percent between 1994 and 1995; projections are that prices will increase 3.2 percent in 1996 and 1.2 percent in 1997.
New home median prices went up 0.8 percent in 1995 and are likely to increase another 0.5 percent in 1996. For 1997, the group predicts a 1.1 gain in median new home prices.
Distressed properties or fixer-uppers can be found everywhere. These properties are poorly maintained and have a lower market value than other houses in the neighborhood. It is often recommended that buyers find the least desirable house in the best neighborhood. You must consider if the expenses needed to bring the value of that property to its full potential market value are within your budget. Most buyers should avoid run-down houses that need major structural repairs. Remember the movie " The Money Pit?" Those properties should be left to the builder or tradesman normally engaged in the repair business.
CMHC provides mortgage loan insurance for the purchase of a home and the cost of any immediate renovations, or for refinancing where funds are used to make improvements which increase the market value of the property.
Available for Purchase or Refinance Transactions
Used when the loan includes improvement costs that are less than or equal to
10% of the property's estimated as-improved value.
One easy transaction - once approved, Approved Lenders can
advance funds as without requiring CMHC authorization
Benefits of CMHC Purchase or Refinance with Improvements:
v Flexibility - Ideal for small scale renovation projects financed in
conjunction with a home purchase or a refinance transaction.
v Competitive Interest Rates - Access to CMHC insured financing,
and as a result, competitive interest rates.
v Availability - Available coast-to-coast-to-coast with no set maximum
Remodeling a home improves its livability and enhances curb appeal, making it more salable to potential buyers. Some of the popular improvement projects are updated kitchens and baths, enlarged master bedroom suits, home-office additions and increased amenities in older homes.
The resale market is often difficult because you are competing with new construction. You need to give your home every competitive advantage you can if you are selling an older home.
Home offices are a relatively new remodeling trend. Adding one to a house often recoups 58 percent of the costs, according to a survey found in a report called "Cost vs. Value Report" in Remodeling Magazine.
a. The incidence of foreclosures is cyclical, based on national and regional economic trends.
b. Buying directly at a legal foreclosure sale can be risky and dangerous. The process has many disadvantages.
c. A RE/MAX® Sales Representative is well versed on how Foreclosure Sales work. They will be able to guide you through the process. In particular, most Foreclosure Sales are sold "As Is". This means that the lender who is selling the property has no knowledge of the condidtion of the property and will not be responsible for any defects.
d. It is important to secure a property inspection and seek legal advice as to ramifications of purchasing a Foreclosure property.
Be sure to find out who your real estate REALTOR® is representing before you tell them too much. The degree of trust you have in an REALTOR® may depend upon their legal obligation of representation. An agency working with a buyer has three possible choices of representation. The REALTOR® can represent the buyer exclusively, called buyer agency, or represent the seller exclusively, called seller agency, or represent both the buyer and seller in a dual agency situation. REALTORS® are required to disclose all possible agency relationships before they enter into a residential real estate transaction. Here is a summary of agency relationships:
The Real Estate Council of Alberta created this brochure to help you make an informed decision about the type of relationshipo that you choose to have with your real estate industry member. You have a number of relationships choices and your industry member has the responsibility to explain the options you have. It is in your best interest that you understand what duties you are owed and whaqt limitations there are, or might be, when you choose a certain relationship. Ask questions and be sure you are satisfied with the anwsers before you enter into a particular relationship.
1. Common Law Agency: If the brokerage operates under common law agency, your relationship is with the brokerage. Therefore, the broker, associate brokers and associates employed by that brokerage are also in an agency relationship with you. The Exclusive Seller Brokerage Agreement and the Exclusive Buyer Brokerage Agreement explain the nature of the agency relationship in detail. Should the other party to a potential transaction be represented by another brokerage, your brokerage will continue to represent you as a sole agent. Should the other party to a potential transaction be represneted by the same brokerage as represents you, the brokerage has a conflict of interest. The conflict arises from the brokerage's obligation to be loyal, disclose all relevant facts, and maintain confidentiality of personal informaiton for you and the other party in the transaction, which results in competing interests. Several options exist to resolve this conflict, one being tranbsaction brokerage, which will be discussed shortly.
2. Sole Agency: In sole agency, your brokerage owes you the duties already described. You are still in a sole agency relationship with your brokerage even if the other party in a potential transaction is a customer of the same brokerage, a client of a different brokerage, or represents him or herself. During the brokerage's efforts to sell your property or help you purchase one, the brokerage may represent another party in the same potential transaction. The brokerage must dicuss your options with you as soon as this potential conflict arises. Your industry member will present you with options and the solutions included in the agreement, and seek your informed consent.
Transaction Brokerage: In transaction brokerage, the same brokerage represents both the buyer and the seller in the same real estate transaction. In this case, either your agent or another agent of the brokerage is representing the other party to the transaction. Transaction brokerage is permitted with the fully informed and coluntary consent of both parties to the transaction. The brokerage must obtain your written consent to transaction brokerage before this relationship may occur, before any offer is made to buy or sell a property, and before the identity of the other party and circumstances of the transaction are known. If the other party to the potential transaction is represented by the same brokerage as represents you, your industry member needs to discuss the Transaction Brokerage Agreement with you at that time and seek your informed consent. With transaction brokerage, the nature of the brokerage services to you and the other party change from representation to facilitation. The Transaction Brokerage Agreement is an amendment to your existing buyer or seller agreement, if applicable.
3. Designated Agency: If a brokerage operates under designated agency, your agency relationship is with the industry member and not with the brokerage. Should the other party to a potential transaction be represented by another industry member in the same brokerage, each industry member will be in sole agency with their respective clients. This is a key difference berween common law agency and designated agency. Therefore, should you choose to work with an industry member who is employed by a brokerage operating under designated agency, you will need to sign a written service agreement. If you are a seller of property you will be asked to sign the Exclusive Seller Designated Brokerage Agreement, and if you are a buyer, you will be asked to sign the Exclusive Buyer Designated Brokerage Agreement. These documents explain the nature of the agency relationship in detail and confirm your choice of agnecy representation. A designated agency relationship allows your designated agent to fulfill his or her full duties and obligations to you when the other party to a transaction is represented by another industry member of your brokerage.
Making an Informed Decision
Your real estate industry member has the responsibility ot explain the options your have. It is in your best interest that you understand what duties you are owed and what limitations there are, or might be, when you choose a certain relationship. Ask questions of your industry member and be sure you are satisfied with the anwsers before you enter into a particular relationship.