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Advantages of Buying |
Home Finance 101 |
Preparing to Shop |
Your Real Estate Team |
Making an Offer |
Getting a Mortgage |
Closing the Deal |
After You Buy
Home Finance 101
What you Can Afford/Pre-Approval, Down Payment, Closing Costs, Insurance, PMI, Property Taxes, Tax Benefits: Ownership, Tax Benefits: Selling, Maintenance Costs
Determining What you Can Afford and Pre-Approval
Find a loan that's right for you
How Much Can I Afford? With so many loan programs available, it's important to find the best fit for you. Talking to a lending professional early in the process will save you time by letting you focus on homes in your price range.
Become Pre-Approved for a Home Loan
Time is a key element in your home search. By becoming pre-approved for your loan, you not only save time, you also:
- Can focus your search on the homes that best fit your financial picture
- Have confidence when making an offer to purchase a home
- Show the seller your offer is serious and already conditionally approved
- Be knowledgeable about down payments
Your down payment can vary greatly depending on the type of loan you have and what your resources are. Today, many lenders have options for down payments as low as 3 percent. There are even a few programs available with a ZERO down option, allowing a buyer to finance 100 percent of the purchase price. Some will even allow you to finance up to 3 percent of the closing costs.
Gifts and loans from sources other than a bank can help with your down payment. This option can't be used with all loan programs, so be sure to talk to your lender first. If you have a 401k program with your employer, you may be able to withdraw from it for a down payment. Check with a qualified tax specialist to learn about ways to utilize your retirement savings without incurring a penalty.
Accumulating a Down Payment
When you set out to purchase a home consider the following:
- How much money should you save for the down payment and closing costs for the purchase of your home?
- Where is your down-payment money going to come from?
- How should you invest this money while you're awaiting the purchase and closing?
The 20 percent solution
It's recommended that buyers try to accumulate a down payment that represents 20 percent of the purchase price of the property. Twenty percent down is a safe number because it provides adequate protection for lenders and allows the buyer to avoid added fees and mortgage insurance.
If a buyer only puts down 10 percent, and property values drop 5 percent, the lender could be at risk. Lenders have found that they are in a safer position when a borrower has made a down payment of at least 20 percent.
Less than 20 percent and private mortgage insurance (PMI)
Banks and other mortgage lenders may require you to obtain private mortgage insurance (PMI) if your down payment represents less than 20 percent of the purchase price of the property. PMI protects the lender financially if the buyer defaults on the home loan.
Plan for Closing Costs
Be sure to plan for closing costs when looking at financing your new home. Closing costs vary according to price, and these costs are in addition to down payment costs. These costs may include:
- Loan Fees: Charges from the lender for processing the application, getting credit reports, and loan origination fees.
- Escrow Fees: The costs involved in preparing the documents and handling the closing process.
- Homeowners Insurance: Insurance premium protecting the investment for you and your lender.
- Title Insurance: A one-time charge protecting you against the possibility that the seller doesn't have legal authority to sell the home. (Review your title policy).
- Inspections: Costs for having a professional inspector examine your new home to alert you of any potential problems.
- Private Mortgage Insurance: A requirement of many lenders if you put less than 20 percent down.
Learn about all loan types
Because financial pictures vary from buyer to buyer, there are a wide variety of loans available. Shopping for a loan is a lot like shopping for new shoes, you need to find one that fits you well.
In order to strengthen your chances of an efficient loan approval, you need to be completely candid with your lender about all aspects of your financial history. Knowing what your credit looks like can help make the overall loan approval process much more efficient.
When you purchase a home, your mortgage lender will ask you to demonstrate that you have proper homeowner's insurance. Lenders usually insist that you pay the first year's premium on said insurance policy at the time of the closing.
- When you buy a home, you will want to protect your investment in the property.
- You should shop for insurance ahead of time. Get quotes on insuring properties as you evaluate them or ask current owners what they pay for their coverage.
- When shopping for insurance, explain to the insurance agent what type and cost of properties you are looking at and where they are (zip codes). They should be able to give you a ballpark monthly cost estimate for insurance. Calling insurance agents now will also enable you to begin to evaluate which insurers offer the service and coverage you desire when the time comes to actually buy your home.
- To help minimize the cost, it's helpful to buy the most comprehensive coverage and take the highest deductible that you can afford.
PMI: Mortgage Insurance
If you buy the home and make a down payment of 20 percent of the purchase price, the lender is putting up the other 80 percent of the purchase price. In most states, your home is the lender's security for the loan.
- Almost all lenders today require you to purchase private mortgage insurance (PMI) if you put down less than 20 percent of the purchase price when you buy.
- PMI is not a permanent cost. Your need for PMI vanishes when you can prove that you have at least 20 percent equity (home value minus loan balance outstanding) in the property. The 20 percent can come from loan paydown, appreciation, improvements that enhance the value of the property, or any combination thereof.
When you buy and own a home, your local government (typically through what is called a County Tax Collector's office) sends you an annual or semi-annual, lump-sum bill for property taxes.
Property taxes are typically based on the value of a property. You should investigate what the exact rate is in your area. You can call the Tax Collector's office in the town where you're contemplating buying a home and ask what the property tax rate is and what additional fees and assessments may apply.
Your property taxes will probably be recalculated based upon the price you paid for your home.
If you make a small down payment (typically defined as less than 20 percent of the purchase price), your lender may require property tax and insurance impound accounts. These accounts allow you to pay your property taxes and insurance to the lender each month along with your mortgage payment.
Tax Benefits of Ownership
One of the treasures of homeownership is that the IRS and most state governments allow you to deduct, within certain limits, mortgage interest and property taxes when you file your annual income tax return. When you file your Federal IRS Form 1040, the mortgage interest and property taxes on your home are itemized deductions.
On mortgage loans now taken out, you may deduct the interest on the first $1,000,000 of debt as well as all of the property taxes. The IRS also allows you to deduct the interest costs on a home equity loan (second mortgage) to a maximum of $100,000 borrowed.
Tax Benefits of Selling
When you sell your home, the IRS allows you to deduct home improvement costs from your profits before paying taxes on them. Therefore, it is in your interest to track the amount you spend on improvements. IRS home sale tax rules also enable qualifying taxpayers to exclude from federal taxation a large chunk of profit -- up to $250,000 for single taxpayers, $500,000 for married couples filing jointly.
For tax purposes, at the time of sale the IRS enables you to deduct the cost of improvements but not money spent on maintenance. What's the difference?
- Capital improvements are things that you do to your home that permanently increase its value and lengthen its life. Capital improvements include such things as landscaping your yard, adding a deck, purchasing new appliances (as long as you leave them when you sell), installing a new heating system or roof, remodeling and adding rooms, et cetera.
- Maintenance and repair expenses include those types of fix-up items that need to be done throughout your home from time to time. Maintenance and repairs include such things as fixing a leaky pipe or toilet, painting, paying someone to mow your lawn and pull weeds, et cetera.
When you buy a home, it's important to keep a file folder which you can store receipts for your home improvement expenditures. If you're in doubt as to whether an expense is an improvement or a maintenance item, keep the receipt and review it with your agent when the time comes to sell your home.
Maintenance and Other Costs
Homes require maintenance over the years. As a rule of thumb, anticipate spending about 1 percent of the purchase price of your home each year on maintenance. Some years you may spend less, other years you may spend more. With some types of housing, such as condominiums, you pay monthly dues into a homeowners association, which takes care of the maintenance for the complex. In that case, you're only responsible for maintaining the interior of your unit. Check with the association in buildings where you might buy a unit to see what the dues are and whether any new assessments are planned for future repairs.