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Chapter 28:
Deciding to Buy a Home
Deciding to Buy a House
Advantages:
Build equity: difference between fair market value and the debt in the property (how much you owe compared to how much it is worth)
Deduct real estate taxes and mortgage interest paid on federal income taxes
Disadvantages:
Cost of upkeep
Inconvenience of upkeep
Inability to move quickly
and easily
Deciding to Buy a House
Can you afford it?
Mortgage: written instrument by which the borrower pledges real property as security for the loan
Can be prequalified: how much you can afford and what down payment is needed based on your income
Deciding to Buy a House
Recommendations:
Mortgage payment should not
exceed 28% of monthly take-
home pay
Included: principal amount of
loan, interest, and taxes
Total monthly debt should not
exceed 36% of income
Limit monthly housing
expenses
Factors Considered:
Monthly income and expenses
Credit history
Employment history
Source of down payment
(savings account, family, etc.)
Value of property
Loan-to-Value Ratio:
Mortgage/Market Value
Bigger down payment, lower
ratio
Finding the Right House
Finding the Right House
Things to consider as a home-buyer:
Taxes
Location
Size
Transportation
Schools/hospitals/rec centers (YMCA)
Churches
Zoning restrictions
Price in neighborhood
Purchase and Sale Agreement
Written stmt of the rights
and duties of both parties
Example items:
Clear title
Refunds given if needed
Payment of utilities
Certificate that house is free
of termites
Use a lawyer if possible; if
not, read carefully and make
adjustments as needed
Applying for a Mortgage
Locations:
Banks
Credit Union
Mortgage Companies
Insurance Companies
Pay off mortgage, you own property outright
Cannot pay off mortgage, foreclosure happens
In a foreclosure, lender sells property to receive payment for loan
Mortgage Costs
Typical Costs:
Application Fee
Appraisal Fee
Credit Report Fee
Inspection Fee
Origination Fee
Point: one-time charge
equal to 1% borrowed
Other costs:
Document Preparation
Attorney’s Fees
Title Insurance
Surveyor Fees
Termite Inspection
Mortgage Insurance
Homeowner’s Insurance
Mortgage Costs
RESPA: Real Estate Settlement Procedures Act protects buyers
Provide booklets explaining real estate settlement procedure
Give estimate of costs incurred
Later, give exact details of cost
Provide a truth-in-lending statement showing true costs of interest and finance charge on loan
Types of Mortgages
Traditional
Loan made between borrower and private lender at market interest rate
Need a large down payment
Fixed-Rate
Large down payment
Interest rate never changes throughout life of loan
Graduated-Payment
Fixed interest rate through life of loan
Payments grow over life of loan
Balloon-Payment
Low fixed payment through life of loan
One large final (balloon) payment
Types of Mortgages
Veteran’s Administration:
Guarantees loans made to
eligible veterans
Offer:
Lower interest rates
Reduced costs
Little/no down payment
VA guarantees repayment of
60% of outstanding loan
VA will provide their own
loans in lower economic areas
Type of Mortgages
HUD/FHA:
Federal Housing
Administration
U.S. Dept. of Housing and
Urban Development
Qualified home buyers make
small down payments
Get loan that is guaranteed by
org.
Protects lenders from default
borrowers
Taking Title
Co-ownership:
Tenancy in common:
Two or more people have undivided interest in property
If one dies, their heirs inherit their portion of the property
Joint tenancy:
Two or more people have undivided interest in property
If one dies, their interest automatically goes to the surviving tenants
Tenancy by the entirety (based on Common Law doctrine):
Special tenancy for lawfully married husband and wife
Both have equal, undivided interest on whole property
Property cannot be taken unless both spouses are being sued together
Taking Title
Deed: Formal written
instrument that transfers
ownership of real property
Grantor: gives deed
Grantee: receives deed
Recorded in public records
office
General Warranty Deed:
Says title to property is good
If title turns out to be faulty,
seller will take care of any
loss suffered by buyer
Special Warranty Deed:
No defect in title while
current owner had it
Does not guarantee anything
from previous owners
AKA Limited Warranty Deed
Taking Title
Bargain and Sale Deed:
Transfers title without
warranties
Similar to other deed, but with
no warranties
Quitclaim Deed:
Release’s the grantor’s right
to the property
Passing of Title:
Title passes on closing date
Typically, buyer/seller meet
face-to-face this day to sign
papers and pass keys over
Escrow: depositing money,
legal documents, and
instruction with a third party
to be held until the conditions
of the contract are fulfilled;
agent checks title examined,
prepares documentation,
closes transaction
Limitations on Property Use
Rights of a property
owner:
Use the property during
your lifetime
Exclude others from
using it
Leave property to your
heirs when you die
Sell property to someone
else during your lifetime
Police Power:
Right of government to
regulate the use of real
property for the public
welfare, morals, and
health
Overall: protection of the
people
Limitation on Property Use
Nuisance and Zoning:
Nuisance: interferes with the
enjoyment of life and/or
property
Examples:
Smoke/dust
Bright lights
Odors/fumes
Zoning Laws: how property
may be used in a specific area
Examples:
One-family living
Multiple-family living
Limitations on Property Use
Health and Public Safety:
Fire-prevention laws
Required inspections
Certificates of occupancy
Soundness of construction
Eminent Domain:
Right of government to take
private property for public use
with or without consent of
owner
Examples:
Parks
Roads
Schools
Owner is compensated, but if
an amount cannot be agreed
upon, courts decide
appropriate amount
Limitations on Property Use
Air Rights:
Past: owners had right to
property from surface to
sky and down to center
of earth
Changed with creation of
aviation
Now: only have right to
what you actually use
(have reasonable control)
Air rights CAN be sold
Adverse Possession:
Someone who does not
own property takes
possession for a length
of time stated by area
Uninterrupted time with
continuous owners count
Possession must not be
secretive
Example: wrong
property line
Limitations on Property Use
Subterranean Rights:
Ownership of property
below the land surface
Examples:
Mines
Wells
Riparian Rights:
Rights of persons to use
water from a waterway
that runs through their
property
Uses/restrictions:
Fishing/boating/swimming
Pollution/change direction
Water freezes: ice is
considered to be part of
the land
Limitations Arising Out of Contract
Deed Restrictions:
Set to control future property use
Examples:
Require house/land price not fall below specific price
Require houses to be a specific distance from street
Restrict land use for a specific period of time
Limitations Arising Out of Contract
Easement: Make some use of land belonging
to another
Cannot be terminated w/o consent of owner with right
Examples: Driveways
Drainage
License: Right to do something on
another’s land that may be considered trespassing normally
Examples: Hunting
Fishing
Advertising
Special Types of Home Ownership
Mobile Homes:
AKA: Manufactured homes
Less expensive
Upkeep is less
Unless on permanent foundation, are considered personal property: no real estate taxes
Ownership and parks are regulated by the state
Special Types of Home Ownership
Cooperatives:
Buyers purchase shares in the corporation that owns/holds mortgage of the apartment building
Shares depend on size and cost of the unit
Have usual rights of ownership for your unit
ADV: deductions from taxes
DIS: if one defaults, other tenants may have to make up the difference or deal with foreclosure
DIS: if co-op is sold, new board of directors must approve you
Special Types of Home Ownership
Condominiums:
Each owner has absolute,
individual interest in your
property
Undivided interest in common
areas:
Parking
Pools
Elevators
Must comply with condo
association
ADV: default by one owner
does not affect another
End of Chapter Questions:
What is a mortgage?
What are the different types of ownership?
How can property use be limited?
Give examples of different types of deeds.
What is a point?
Why was RESPA created?
What is equity?
What is foreclosure?