Q & A – About Buying

Here are just some of the questions that are commonly asked concerning the purchase of a home or property. Please feel free to email us with additional questions that we can also post in this forum.

Q: What is the value of a troubled property?

A: Buyers considering a foreclosure property should obtain as much information as possible from the lender about the range of bids being sought. It also is important to examine the property. If you are unable to get into a foreclosure property, check with surrounding neighbors about the property’s condition. You may also do your own cost comparison by researching comparable properties recorded at local county recorder’s and assessor’s offices, or through internet sites specializing in property records.

 

Q: Why buy a house?

A: Here are some frequently cited reasons for buying a house:

  • You need a tax break. The mortgage interest deduction can make home ownership very appealing.
  • You are not counting on price appreciation in the short term.
  • You can afford the monthly payments.
  • You plan to stay in the house long enough for the appreciation to cover your transaction costs. The costs of buying and selling a home include real estate commissions, lender fees and closing costs that can amount to more than 10 percent of the sales price.
  • You prefer to be an owner rather than a renter.
  • You can handle the maintenance expenses and headaches.
  • You are not greatly concerned by dips in home values.

 

Q: What can I afford?

A: Knowing what you can afford is the first rule of home buying. What you can afford depends on how much income and how much debt you have. In general, lenders don’t want borrowers to spend more than 28 percent of their gross income per month on a mortgage payment or more than 36 percent on debts.

It pays to check with several lenders before you start searching for a home. Most will be happy to roughly calculate what you can afford and prequalify you for a loan. The price you can afford to pay for a home will depend on six factors:

  1. Gross Income
  2. The amount of cash you have available for the down payment, closing costs and cash reserves required by the lender
  3. Your Outstanding Debts
  4. Your Credit History
  5. The Type of Mortgage You Select
  6. Current Interest Rates

Another number lenders use to evaluate how much you can afford is the housing expense-to-income ratio. It is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your new home loan, property taxes and hazard insurance (or PITI as it is known). If you have to pay monthly homeowners association dues and/or private mortgage insurance, this also will be added to your PITI.

This ratio between your housing expense and your monthly should fall between 28 to 33 percent, although some lenders will go higher under certain circumstances. Your total debt-to-income ratio should be in the 34 to 38 percent range.

 

Q: How much will I spend on maintenance expenses?

A: Experts generally agree that you should plan to spend one percent of the purchase price of your house annually on repairing gutters, caulking windows, sealing your driveway and the myriad other maintenance chores that come with the privilege of homeownership. Newer homes will cost less to maintain than older homes. It also depends on how well the house has been maintained over the years.

 

Q: Where do I get information on housing market stats?

A: A real estate agent is a great resource for statistics of the local housing market, as well as your statewide association of Realtors, most of which are continuously compiling such data from local real estate boards. For overall housing information, U.S. Housing Markets regularly publishes quarterly reports on home building and home buying. Your local builders association probably gets this report.

If not, the housing research firm is located in Canton, Mich. You can call (800) 755-6269 for information, or visit them online. Finally, check with the U.S. Bureau of the Census in Washington, D.C. at (301) 495-4700. The census bureau also maintains a site on the internet.

The Chicago Title company also has published a pamphlet, “Who’s Buying Homes in America.” Feel free to write Chicago Title and Trust Family of Title Insurers, 171 North Clark St., Chicago, IL 60601-3294.

 

Q: What is the standard debt-to-income ratio?

A: A standard ratio used by lenders limits the mortgage payment to 28 percent of the borrower’s gross income and the mortgage payment, combined with all other debts, to 36 percent of the total. The fact that some loan applicants are accustomed to spending 40 percent of their monthly income on rent, still promptly making the payment each time, has prompted some lenders to broaden their acceptable mortgage payment amount when considered as a percentage of the applicant’s income.

Other real estate experts tell borrowers facing rejection to compensate for negative factors by saving up a larger down payment. Mortgage loans requiring little or no outside documentation often can be obtained with down payments of 25 percent or more of the purchase price.

 

Q: How long do bankruptcies and foreclosures stay on a credit report?

A: Bankruptcies and foreclosures can remain on a credit report for seven to ten years.

Some lenders, nevertheless, will consider a borrower if he has reestablished good credit. The circumstances surrounding the bankruptcy can also influence a lender’s decision.

For example, if you went through a bankruptcy because your employer had financial difficulties, a lender may be more sympathetic. If, however, you went through bankruptcy because you overextended personal credit lines and lived beyond your means, the lender will be less inclined to be flexible.

 

Q: What is Fannie Mae’s low-down program?

A: Fannie Mae is expanding the availability of low-down-payment loans in an effort to help more people nationwide qualify for a mortgage, particularly due to our current economy. Two new programs will help potential buyers overcome two of the most common obstacles to home ownership, low savings and a modest income.

Addressing many first-time buyers’ struggles to save the down payment, Fannie Mae developed Fannie 97. This program provides 97 percent financing on a fixed-rate mortgage with either a 25-year or 30-year loan term through Fannie Mae’s Community Home Buyers Program.

Fannie Mae’s new Start-Up Mortgage will assist buyers with a five percent down payment no matter their income level. Applicants do not need as high an income to qualify or as much cash for closing as with traditional mortgages. Borrowers will receive a 30-year, fixed-rate mortgage with a first-year monthly payment that is lower than the standard fixed-rate loan.

Freddie Mac, Fannie Mae’s counterpart, also offers low-down-payment loan programs.

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