HOMEOWNERSHIP EDUCATION Presented by the Iowa City Area Association of REALTORS® Fair Housing Ambassadors & the City of Iowa City Housing Authority
Purpose • A clear presentation of the components necessary to become a homeowner and sustain homeownership.
The Iowa City Housing Authority • Has successfully maintained 3 homeownership programs since 1998. • Presently partnering with 6 local lenders and continue efforts to establish more partnerships. • A total of 51 families have achieved homeownership with the help the ICHA. • Several additional families are in the process of moving to homeownership.
What Will be Covered • Is Homeownership Right for Me? • Financial Management • Shopping for Your Home • Shopping for Your Loan • Closing on Your Loan • Taking Care of Your New Home • Predatory Lending • Fair Housing • Glossary
RENTING – PROS AND CONS • Renting – On the Minus Side • Rent could increase at each renewal • Landlord probably will control paint color • No chance to build equity – personal wealth • Renting – On the Plus Side • Generally requires less up-front cash • Don’t have to worry about maintenance • Can move at end of lease-don’t have to sell • Late rent payments may be arranged with Landlord
OWNING – PROS AND CONS • Homeownership – On the Minus Side • Requires upfront cash – down payment, closing costs. • Overall housing expenses will most likely increase. • Increased maintenance responsibilities. • If want to move, will need to sell property. • Chance that property may lose value. • If come on financial hard times, may lose your property. • Homeownership – On the Plus Side • May deduct interest and property tax payments from their federal income tax. • As you pay what you owe lender – build equity. • If property rises in value, build equity. • You can decorate to your taste. • You own something tangible that can be left to heirs.
ARE YOU READY? • Do the pluses of homeownership outweigh the pluses of renting? • Are you comfortable with the increased challenges and responsibilities of being a homeowner? IF YOU ARE READY TO TRANSITION FROM RENTER TO HOMEOWNER, WITH PREPARATION AND PLANNING, IT IS POSSIBLE!
Financial Management • Impulse spending: • Creates a habit of overspending • Buyer • Budgeting: • Tracks where money goes • Controls spending • Improves spending habits • Shopper
Are You an Overspender? • Still paying for purchases older than 1 year? • Use credit cards even when you have cash? • Frequently overdrawn? • Race to bank to make deposit before checks you’ve written come in? • Have you stopped making savings deposits? • Wonder why you’ve purchased something?
Overspending? (con’t.) • Feel “out of control” when facing buying decisions? • Juggling payments to keep creditors satisfied? • Credit cards maxed out? • Feel free to spend more after clearing up debt? • Surprised on the interest you pay creditors? • Hope your kids will handle their credit better than you? • Would a small reduction in income or an emergency expense force you to neglect credit obligations?
Creating a Budget • Set realistic goals • Develop flexible goals • Be specific and put into writing • Involve the entire family
Short Range Goals • Short Range Goals • Achieved within the period of time covered by each pay check • Includes rent/mortgage, utilities, groceries, childcare, gasoline, credit card payments and other monthly expenses.
Long Range Goals • Long Range Goals • Determined by how long it takes to accumulate money to meet goal. • Requires saving to pay for these items. • Includes buying a home, buying new clothes, buying a car, paying off bills, continuing education, taking a vacation, buying furniture.
Establishing Priorities • NEEDS – essentials such as shelter, food, transportation, employment • WANTS – homeownership, different vehicle, new haircut, different job, pizza delivery • WISHES – live in a mansion, run a big company, drive a BMW
Keys to Successful Budgeting • Involve the entire family • Develop your own plan – don’t follow a plan made for another family • Prioritize your family’s goals (needs, wants, and wishes) • Plan ahead for the whole year • Include all income and expenses • Keep good records • Track and record every penny spent to control spending habits • Set aside money to cover home maintenance • Try to save 10% • Don’t give up if you fail at times • Review your plan once a month.
Budget Questions • What are the biggest items on your budget? • How much are you saving each month? • How could you save more money? What items could you cut or reduce? • In what way do you see your financial picture changing in the next year? In the next five years?
Shopping For Your Home • Where will the home be located? • What community amenities are important? • What type of home? • Is adequate transportation available? • Is it convenient to shopping? • Are quality schools nearby? Remember: Needs, wants and wishes…. BE FLEXIBLE!
Choosing the Right Neighborhood For Your Family • Consider: • Where you work • How far are you willing to commute? • Neighborhood school • Does it meet my children’s needs? • Transportation • Is it on a City bus route? • Will the kids need a ride to school? • How far away are the grocery stores and shopping centers? • Adequate police and fire protection • Where is the closest fire station? • How far away is the police station?
Choosing the Right Neighborhood For Your Family • Also Consider: • Associated homeowner expenses • How much are the property taxes? • How much will insurance be? • Appearance of surrounding homes • Are the neighboring homes well cared for? • Are there security bars and/or alarm systems? • Safe, friendly, attractive environment • Are there churches nearby? • What are the crimes statistics for this neighborhood? • Is there a neighborhood association?
SELECTING YOUR REALTOR® • Ask family & friends for a referral • Meet with a potential Realtor • Is the Realtor familiar with the area, local resources, and local contacts? • Determine if your needs are understood. • Does the Realtor have good judgment? • Does the Realtor listen well? • Are you comfortable with the Realtor – do you feel a connection?
Role of the Realtor • Realtor can represent seller, buyer, or both • Representing the Seller – highest price/best terms for seller • Representing Buyer – lowest price/best price for buyer • Representing Both – can provide insight about the home, and possible points of negotiation that will satisfy the needs of both the seller and the buyer NOTE: In Iowa, a realtor is required, by law, to disclose who they represent in the home buying process.
Services of the Realtor • Can recommend: • Mortgage lender • Professional home inspector • Attorney • Insurance agent • Abstract/ title companies • Builder • Belongs to the Multiple Listing Service (MLS) • Buyer pays nothing for the realtor’s services. • Handles all negotiations • Monitors completion of process for closing.
Other House-Hunting Resources • Newspaper • Real Estate Shopper Guides • “For Sale” signs in yards • Websites • Foreclosed homes • Non-profit housing agencies • Auctions • Unadvertised, vacant homes (www.iowacity.iowaassessors.com)
Viewing Homes • Most people view 15-25 homes before selecting one to buy. • Take Notes on each property • Inspect the interior and exterior • Take a flashlight, tape measure, camera • Determine what is included in purchase price • Consider the neighborhood
Buyer’s House Inspection • Walls - water stains, curved in or out, • Siding - Moss, mildew, or stains on lower siding, wavy or soggy • Roof - Sagging or worn, many layers of shingles, stains or mildew on underside • Paint – flaking, peeling • Windows/doors – crooked, cracks above, gaps, • Floors – uneven, spongy, worn coverings • Electrical – excessive extension cords, adequate • Odors – pets, dampness, sewer gas • Yard – proper drainage, appropriate grass coverage, healthy trees • Plumbing –leaking faucets, running toilets, leaking pipes • Insulation – at least 9” in attic • Sidewalk – level, trip hazards Take notes on each property to compare possible items to negotiate or to be prepared to correct if you should buy the property.
Negotiating an Offer Consider the following: • Typical sale price in the area for similar property. • Condition of home • Pre-approval amount • Days on the market • Previous price reductions by seller • Other offers on the table?
Making the Offer • Buyer’s realtor will prepare written offer, including contingencies, and present it to the seller’s realtor • Seller then has 3 options: • Acceptance – No changes or modifications • Rejection – seller refuses the offer altogether • Counter Offer – Seller proposes changes to the buyer’s original offer. Buyer then can accept, reject or propose a counter to the counter offer.
Offer to Purchase Should include: • Full legal description of the property as well as the street address • Amount of “earnest money” (deposit) • Offer expiration date and time • Contingencies • Buyer’s financing • Deadline to complete sale • Seller’s agreement to make certain repairs • Any personal items that will stay
Home Inspections • “Caveat Emptor” – Let the buyer beware • Visual examination of structure, construction, & mechanical systems of the home. • Provides detailed information about the physical condition of the home • Identifies repairs needed and estimated costs • Includes photos • Generally costs $250 or more, depending on the size of the home • Reports on: • Heating and air conditioning systems • Plumbing and electrical • Roof, gutters and downspouts • Attic, visible insulation • Visible drainage systems • Walls, ceilings, floors • Windows, doors, garage • Foundation, basement
After You Find Your Home • Enter into a Purchase Agreement • Include any required contingencies • Order Independent Inspections • Home inspection • Pest inspection • Review Inspections • Determine if there is anything that you want corrected by the seller • Is the property what was presented? • Take Purchase Agreement to Lender • Lender will order an appraisal • Lender will determine a closing date
Shopping for Your Loan • Types of financial lending markets • Primary Market • Secondary Market
Primary Market • Lender makes loan directly to homebuyer • Lenders include • Commercial Banks • Savings and Thrift Institutions • Mortgage banks • Mortgage Brokers • Credit Unions
Commercial Banks • Specialize in consumer and construction lending.
Savings and Thrift Institutions • Provide residential mortgages • Regulated and insured by FDIC (Federal Deposit Insurance Company) or other state agencies
Mortgage Banks • Independent firms or branch of commercial bank that originate mortgages • Only deal in loans (do not accept deposits) • Typically originate (make) loans and sell them to other financial institutions.
Mortgage Brokers • Do NOT loan money • Originate and process loans for several lenders • Familiar with many different loan products • Can often help borrowers with unique or less than perfect credit in locating financing • Are NOT regulated • Charge additional fees for services
Credit Unions • Private banking organizations • May offer very good mortgage rates for members • Generally regulated by federal or state agencies
Secondary Market Institutions • Purchase mortgage loans made by primary market lenders • Allows primary lenders to sell some or all of their portfolio (loans) to replenish their cash so more loans can be made available • Include Fannie Mae(Federal National Mortgage Association)and Freddie Mac(Federal Home Loan Mortgage Corporation) • FHA and VA loans are guaranteed by Ginnie Mae(Government National Mortgage Association- division of HUD)
Mortgage Products • Mortgage products vary in: • Down payment requirements • Allowable debt • Loan-to-value ratios (LTV) • Credit requirements • Reserved cash
Conventional Loans • Down payments as low as 3% - 5% • Flexible underwriting criteria • Process of analyzing loan application to determine the amount of risk involved in making the loan; includes review of borrower’s credit history, and judgment of property value • Increases opportunities for first-time homebuyers.
Private Mortgage Insurance (PMI) • May be required for loans in which homebuyer pays less than 20% of purchase price as down payment • Premium is usually added to annual percentage rate. • Lender selects the mortgage insurer
Types of Mortgages • Fixed-rate Mortgages • Adjustable-Rate Mortgages • Convertible Mortgages • Temporary Buydowns (or Buydowns) • Balloon Mortgages
Fixed-Rate Mortgages • Interest rate does not change over life of loan • Loan is repaid over a specified period of time – generally 15,20, or 30 years. • While the loan payment for principle and interest will remain the same, adjustments for increases in property taxes and insurance may be made. • Benefit is predictability
Adjustable-Rate Mortgages (ARMs) • Interest Rates are adjusted periodically- usually every 1, 3, or 5 years • Adjustment generally changes the monthly payment • Benefit is lower interest rate in beginning making loan more affordable • Drawback is that possible future interest rate increases may result in significantly higher monthly payments • ARM’s are best suited for borrowers who expect an increase in income in the future and/or do not expect to live in their home for more than 5 – 7 years.
ARM Terminology • Adjustment Period • Predetermined periods when rates and payments change • May include two periods – 3/1 means for the first three years there is a fixed-rate and then there are annually adjustment for the remaining life of the loan • Caps • Adjustment Cap – limit on how much the interest rate can change at each adjustment period • Lifetime Cap – Limit on how much rate can change over life of loan • Most common: Adjustment Cap 1% - 3%; Lifetime Cap 4% - 6% • Index • Measurement used by lender to determine interest rate and any changes charged. • Most common index used is the one-year Treasury Bill Index • Margins • Amount lender adds to an index to determine the rate on an ARM • Represents lender’s cost and profit for doing business
Convertible Mortgages • Fixed interest rate for 3,5,or 7 years • Then convert to market interest rates for remainder of loan • Benefits is lower initial interest rate (Generally higher than an ARM and lower than a fixed-rate) • Drawback is unpredictability of interest rates that could result in higher payment at conversion
Temporary Buydowns • Borrower must place into escrow account at closing, 1% to 2% of the interest rate payment for the first 1-2 years of fixed-rate or ARM loan • Translates into lower monthly payments • Funds may be gift, grant or homebuyer’s money • Benefit is that borrower may qualify for a loan with an initial lower interest rate. • Not used much in Iowa City area
Balloon Mortgages • Loan is made for fixed period of time, usually 3, 5, 7, or 10 years. • Payment remains same for life of loan, with adjustments for taxes and insurance • Refinancing required after loan period • Generally offer lower interest rate than fixed-rate mortgage • Benefit is lower interest rate and more affordable payments • Drawback is uncertainty of future interest rates that may be available at refinancing
Comparison Shopping for Your Mortgage Loan • Type of loan (Fixed-rate, ARM, Balloon, etc.) • Down payment amount required • Interest Rate • Discount points • Equal to 1% of loan amount (1 point of a $90,000 loan equals $900) • Each point paid generally lowers interest rate by .125, creating lower monthly payments • Cannot be financed, must be paid by borrower at closing
Pre-Qualification • Informal way for lender to determine how much money you may be able to borrow – not a mortgage application • Based on what you tell lender about your income and debt • No obligation by either the lender or borrower • Lender may run credit report • Used by borrower to determine price range when searching for a home