To Buy or Not to Buy

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Whether you’re new to the home buying process, or a homeowner that is considering purchasing a new home, we bet you didn’t realize that there are at least 20 top real estate related terms that you may want to understand prior to speaking with a real estate agent or loan officer.

Once you understand the lingo, then you have to look at your situation and make the decision…

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This section highlights some of the basic math and topics of interest that will help you get started on your home buying and financing journey.

If you’re planning to buy a home, you probably have good reasons for your decision. It may be that you share the feeling that owning your own home is a key part of the American dream. But there are also financial issues involved in buying real estate that you need to consider as well.

From one perspective, a home is an investment, maybe the single largest one you’ll ever make.

Like certain other investments, real estate has the potential to increase in value over the years, so that you can sell it for more than you paid. It can also lose value, sometimes dramatically. If you need to sell when real estate prices have dropped, you may have to settle for a lower price than you’d like, or even less than you paid to buy the home.

But unlike investing in equities such as stock or mutual funds, which you buy as a way to achieve your financial goals, most people consider owning a home as an end in itself.

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REASONS TO BUY

There are strong emotional reasons for buying a home — and potentially stronger financial reasons.

Owning can help you feel grounded, and part of a community. It can provide a sense of accomplishment and a place to build family traditions. Often, you have more space than you would in a rental unit that costs the same amount of money. And owning can save you money.

That’s because you can deduct mortgage interest you pay on your primary home and a second home when you file your federal income tax return. You can also deduct real estate taxes you pay to local governments. Those deductions have the potential to reduce your taxes significantly, especially in the first few years after you buy when the bulk of your mortgage payments goes to pay interest.

REASONS TO RENT

On the other hand, you might decide to rent rather than buy a home for practical and financial reasons.

If you’re on your own, for example, getting together a down payment and managing the expense of a mortgage, taxes, insurance, and upkeep may put too great a strain on your budget. And having all your assets tied up in your home has serious drawbacks. Among other things, it limits your ability to invest enough to meet the other goals that are important to you.

Another reason to rent is a job that keeps you on the move or requires you to relocate periodically. It’s not always easy to sell when you’re transferred or change jobs. While your employer may help out with the cost of selling one home and buying another, you can’t count on it. And the most expensive part of buying is the one-time, up-front costs.

FAMILY GIFTS


If your parents or grandparents are willing and able to help you out with buying a home, each of them can give you a tax-free gift of up to $13,000 in 2010. If you’re married, they can give your spouse an equal amount. It’s a case where a timely gift may make a lot more sense than a future inheritance.

Be careful, though. Gifts over the annual tax-free limit may be taxable for the giver. And loans from family members earn imputed interest if the lender doesn’t charge you any — or enough — interest. That means he or she has to pay income tax on the interest that normally would be paid even though you didn’t pay it. One exception occurs when a parent’s loan enables a child with no investment income to buy a home.

 

home for sale soldHOW BUYING WORKS


There are usually three distinct phases in buying a home: accumulating the down payment, finding a mortgage, and building your equity by paying off the mortgage loan.

  1. Generally you need a down payment of at least 10% and sometimes as much as 20% of the purchase price available in cash in order to buy. But you can investigate some federal and state programs, like those run by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), which require a smaller amount up front. Your attorney or real estate agent should be able to tell you about special programs. You can also do some research online, starting with the website of the US Department of Housing and Urban Development at www.hud.gov.
  2. Check your credit report to be sure there’s no negative information that may make it difficult to borrow. Everyone is entitled to one free credit report each year from each of the three major credit bureaus. To access your report go to www.annualcreditreport.com and follow the directions. It may be a good idea to ask for one report at a time, and return to the site later in the year to access a report from a different bureau. That way you’ll know if something shows up on your credit history during the time you’re looking for a home, and you’ll have time to get it resolved. It may also make sense to purchase your credit score.
  3. When you have enough for a down payment, you can begin looking for a home and a mortgage. A mortgage is a long-term loan that provides the money you need to buy the home. You pay the loan back, usually in monthly installments over a 10- to 30-year period.
  4. When you’ve arranged your mortgage and bought your home, you gradually build your equity, or ownership, by paying off the mortgage. In most cases your monthly payment will also include enough to cover the real estate taxes and insurance on the property.

WHAT IF YOU’RE TURNED DOWN?


There are new QM rules in play now. The QM (qualified mortgage) has to meet certain standards in order for the Government to back the loan. Basically, you have to give the lender enough information that will substantiate the fact that you can repay the loan. Bad credit may prevent you from qualifying. Decisions must be made based on your ability to repay. It’s illegal to discriminate based on age, race, or gender.

If you’re turned down, ask why. Find out which credit reporting company the lender used to check on your credit history and request a copy of that history from the company. It should be free of charge since you’ve been turned down. If there are any obvious errors, follow the instructions on the report to have them corrected and check up on your request. If the negative information is correct, and your credit history has flaws, at least you’ll know the factors that may be blocking your application and can begin to strengthen your credit credentials.

Sometimes you can make out better applying to a bank or credit union where you already have a relationship. You might also work with a mortgage broker who specializes in finding interested lenders. But be very careful. These brokers may make a profit by guiding you to unscrupulous lenders. You might also consider a private arrangement with sellers who would be willing to finance the purchase — although you don’t want to do that without the advice of a real estate lawyer you trust.

Questions?

Tudela-MacArthur

301-509-5111

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