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Real Estate Transitions

What is your Debt to Income Ratio?

Debt-to-Income Ratio Affects Approval & the Interest Rate

Debt-to-Income ratio is a tool that lenders use to qualify buyers for a mortgage and is an important factor in determining loan approval.  It provides an indication of the amount of debt that a potential borrower is obligated to in relation to how much income they have.

Total monthly debts are determined by adding the normal and recurring monthly debt payments such as monthly housing costs, car payments, minimum credit card payments, personal loan payments, student loans, child support, alimony, and other things.

By dividing the monthly income into the monthly debt, you arrive at a percentage of the monthly income.  Lenders actually look at two different ratios commonly called the front-end and the back-end.

The front-end ratio is the proposed total house payment including principal, interest, taxes, insurance, mortgage insurance if required, and homeowner association fees.  Lenders generally don’t want these expenses to be more than 28% of the monthly gross income.

The back-end ratio includes the same items that are in the front-end ratio plus any other monthly obligations like the ones mentioned earlier.  Lenders prefer to see this ratio not to exceed 36% of monthly gross income but some lenders may extend that to 43%.  Borrowers obtaining an FHA mortgage might also be allowed an even higher back-end ratio.

If a borrower had $8,000 monthly gross income, their proposed house payment should not exceed $2,240 or 28% of their monthly gross income.  Then, their house payment and monthly debt should ideally not exceed $2,880 or 36% of their monthly gross income.

For the sake of an example, let’s say that their monthly debt was $900.  That would only leave $1,980 for the maximum house payment.  The monthly debt became a limiting factor affecting the house payment.

In addition to determining whether the buyer qualifies for the mortgage, it could affect the interest rate.  Having good credit and having the proper ratios can result in being approved for a mortgage.  On the other hand, if the debt is on the upper side of an acceptable range, the lender may charge a higher interest rate for the addition risk of a marginal borrower.

While the math is not difficult to come up with your ratios, it is not necessarily a do-it-yourself project.  A trusted lending professional can assess your situation and give you an accurate picture of what price home you can afford and the rate you can expect to pay.

Both things are important to know before you start looking at homes and especially before you contract for one.  All lenders are not the same.  Call me to get a recommendation of a trusted mortgage professional who specializes in the type of mortgage you want. Download this FREE Buyers Guide.

If you would like any professional residential Real Estate advice, contact us at Paramount Real Estate Services.  1008 12th St. SE Salem, OR 97302  503-851-1645

Also, to mobilize us right away to help you move, visit us here:

brianandnina.com/buyers

brianandnina.com/sellers

How much are Buyer’s Closing Costs?

Buyer’s Closing Costs

Ideally, each party will pay their own closing costs associated with the purchase and the sale of a home, but they can be negotiable based on lender requirements and market conditions.

The fees are usually paid at the settlement and will be itemized on the closing statement.  Buyers should be aware of them before contracting for a home.  If a mortgage is involved, the lender will want to verify that the borrower has ample funds available at closing to pay for them.

Buyer’s closing costs can range between two to five percent of the sales price.  The real estate agents should be able to give you an estimate of what a buyer can expect.  The most accurate estimate will come from the lender at the time the loan application is made. They may or may not include other fees that will be charged to buyers by the title or escrow company.

Buyers are required to be provided a standard Closing Disclosure form at least three business days before the loan closing date.  This document will include the loan terms, estimated monthly payments, loan fees and other charges.  This can be compared to the loan estimate provided by the lender when the application was made.

Fees connected to a mortgage

Loan origination fee … This is the lender’s fee for processing the mortgage application.  It can vary in amount but typically, it can be one percent of the mortgage amount.  It may be possible to negotiate this fee into the rate of the mortgage.

VA funding fee … This is a fee charged to the veteran for closing the loan.  It can be paid in cash or rolled into mortgage.  The amount is based on the status of the veteran, their down payment and whether they have had a VA loan before.

Appraisal … This is a fee paid for a licensed appraiser to determine the value of the property.  It validates that the mortgage will not exceed the purchase price and that the buyer has enough down payment based on the type of mortgage applied for.

Attorney fee … This fee is charged to ensure that the legal documents are drawn properly so the lender will have an enforceable mortgage.  It is not for legal representation of the buyer.

Discount points … A point is one percent of the mortgage.  These fees are considered prepaid interest and can be used to adjust the interest rate on the mortgage.

Lender’s title insurance … This coverage insures that the lender has an enforceable lien from title claims on the property.  This policy is usually issued in connection with an owner’s title policy and is priced separately.

Mortgage insurance … Most loans made in excess of 80% of loan to value require mortgage insurance to protect the lender from loss if the property must be foreclosed on.  There is no mortgage insurance requirement on VA loans. FHA mortgage insurance premium has two parts.  There is an up-front charge of 1.75% of loan amount and then, a monthly amount which is added to the payment.  Conventional loans usually collect the first month’s premium in advance and subsequent amounts are rolled into the mortgage payment.

Recording fees … These are fees that are for filing the legal documents with the municipal or county recorders.  The documents would include the mortgage and the deed.

Survey fees … This fee is necessary, based on requirements of the lender, to verify property lines, shared fences and driveways and to identify any other encumbrances.

Underwriting fee … This is a separate fee that covers the research and determination that the entire loan package meets the lender’s requirements.

Fees required by mortgage for escrow account

Property taxes … Lenders can require two to three months taxes to be held in escrow so that there will be enough to pay them in full 60 to 90 days before they are due.

Property insurance … Insurance is paid in advance and the annual premium will be due at closing.  The lender further requires one additional month’s amount so that one month prior to the anniversary date, the premium can be paid for the renewal.

Flood insurance … The lender may require flood insurance on the property based on their assessment of the location in a flood zone or proximity to a flood zone.

Fees connected to purchase of a home

Settlement fee … This is the buyer’s portion of the fee paid to the title or escrow company, or attorney who handles the closing of the sale.

HOA Fee … Home Owner Association fees are usually paid in advance by the owner.  They are prorated at closing for the amount paid that the seller does not benefit from.

Owner’s Title insurance … This coverage insures that the buyer, the new owner, received clear and marketable title from the seller.  It will protect the new owners’ interests should they be challenged.  Even though it may not be required, it is recommended.

Pest inspection … A pest inspection by a licensed exterminator can be required by a buyer to determine if there are active termites or termite damage, dry rot or another pest infestation.

Property inspection … A home inspection conducted by a professional can be required to determine structural integrity of the property as well as all the systems in the home.  It can include but not be limited to plumbing, electrical, roof, heating and air conditioning, appliances and other things.

Title search … Sometimes, title companies waive this fee when an owner’s title policy is issued.  It can be customary that a separate fee is charged in addition to the premium for the title insurance.

Transfer taxes … When government taxes are required, these fees must be collected.

The Consumer Financial Protection Bureau is a U.S. government agency that makes sure banks, lenders and other financial companies treat the public fairly.  You can download a Closing Disclosure Explainer from their website.

If you would like any professional residential Real Estate advice, contact us at Paramount Real Estate Services.  1008 12th St. SE Salem, OR 97302  503-851-1645

Also, to mobilize us right away to help you move, visit us here:

brianandnina.com/buyers

brianandnina.com/sellers

Buying Your First Home

First Things First

If you are making a particular meal for the first time, it is essential to have a recipe so that it turns out the way it should.  Knowing the ingredients and preparation can guide you through the process.

Buying a home is really no different than making a new recipe.  There are certain things that need to be done, many of which should occur in a particular order to save time, money, effort and disappointment.

Your first inclination may be to start searching the Internet for homes and schedule some showings or possibly visit open houses.  Even though this is very gratifying, it shouldn’t be done until you have gone through the preliminaries.

Buying a home for the first-time implies you haven’t been through the process before and even though, you may have a rough idea of what needs to be done, selecting the right agent in the beginning will give you the benefit of years of personal and professional experience that can help you avoid some of the common mistakes made when buying a home.

This agent can direct you to find the other team members that are required like the lender, title company, inspectors and others.  Each member of the team has an important role to play that if not done correctly, could cause delays and possibly, jeopardize the transaction.

An important step is getting pre-approved so that you’ll know exactly what price mortgage and home you’ll qualify for.  This may even allow you to lock-in a mortgage rate before you contract for a home.  The pre-approval could also prove very helpful in negotiating with the seller by removing some of the doubt in their mind regarding an unknown buyer.  Another advantage to pre-approval is that if you are competing with multiple offers, you have the advantage of being more of a known commodity.

You’ll need to assemble some documents for the lender including pay stubs from the past two months, W-2’s from last year, proof of additional income, tax returns for the past two years, bank statements for the last three months, list of all open credit accounts and balances, copy of driver’s license and history of residence for past two years.

Buying a home is one of the most important decisions in your life and it should be done with care and research.  When all the things are done in the right order, finding the “right” home is just like following a recipe.  For more information, download this Buyers Guide that includes great information to help you through the process.

If you would like any professional residential Real Estate advice, contact us at Paramount Real Estate Services.  1008 12th St. SE Salem, OR 97302  503-851-1645

Also, to mobilize us right away to help you move, visit us here:

brianandnina.com/buyers

brianandnina.com/sellers

Is it Time to Buy?

It’s Worth Digging a Little Deeper

There are hundreds of thousands of people who believe, for one reason or another, they cannot afford to buy a home currently.  Some people  may not for any number of reasons but it would be very surprising to know how many who can buy but have gotten some bad information along the way.  It’s worth digging a little deeper to find out the facts.

John and Karen have been renting a home for the last five years at $2,000 a month.  During that time, the value of the home they were renting went up by $30,000 in value while the unpaid balance decreased by $18, 400.  Even though they were fortunate enough the rent remained constant over the five years, they missed out on close to $50,000 of equity that the owner realized instead of them.

Another thing to consider with today’s low interest rates, it is quite common for a mortgage payment to be lower than a tenant is paying rent for a similar property.  So, in this example, John & Karen paid more to rent than a house payment would have been and missed out on the equity build-up that occurred due to appreciation and amortization.

The simple fact is when tenants like John and Karen pay their rent, the landlord is the beneficiary of the rent received as well as the equity earned.  Over time, the rent paid by John and Karen and other tenants will pay for the landlord’s rental.  It a great concept and a good investment.

True, not everyone can afford a home.  A buyer needs money for a down payment and closing costs.   They also need to have income and good credit to qualify for the mortgage.  Some of these may seem insurmountable but instead of imagining that buying a home is not in the cards at the current time, talking to a real estate professional is a better route to take.

There are lots of low-down payment mortgages available including 100% financing for qualified veterans and USDA eligible buyers.  It is sometimes more difficult to find sellers willing to pay all or part of a buyers closing costs when inventory is low, but lenders do allow it.  It is a matter of finding the willing seller.

The source of the down payment could be a gift from a family member as long as there is no repayment expected.  It’s amazing how many parents or grandparents might be willing to help a relative get into a home.  Funds for a down payment may be available as loans or withdrawals from qualified retirement programs like IRAs or 401k plans.  It’s worth investigating based on what retirement programs you have.

Good credit is necessary to qualify for a loan but buyers should not assume that theirs is not adequate.  A trusted mortgage professional can assess a situation and may be able to suggest some things that will not only raise the score enough to be approved but possibly, even raise the score enough to qualify for a better interest rate.

There are a lot of misunderstandings about whether a person can or cannot qualify for a home at this time.  Instead of relying on second hand information or something that might be floating around on the Internet, spend some time with a real estate professional who can give you the facts, assess your situation and if necessary, point you in the right direction to get help from a trusted mortgage professional.  Call us at (503) 851-1645 to schedule an appointment where we’ll help you dig deeper to determine whether you can buy a home now.

Download our Buyers Guide to give you more information.

Also, to mobilize us right away to help you move, visit us here:

brianandnina.com/buyers

brianandnina.com/sellers

Renting vs Owning

Lower Your Cost of Housing

Homeowners still have considerable advantages from the amortization of the mortgage and the appreciation enjoyed by most homes even with taking the standard deduction instead of itemizing to take the interest and property tax deduction.

There is an adage, “Rent or buy, you pay for the house you occupy.”  You either pay for it yourself or for your landlord.  The people who have job security, sufficient income, good credit and the funds for the down payment and closing costs can enjoy the many financial and emotional benefits of homeownership.

Looking at a $350,000 home purchased with an FHA mortgage with 3.5% down payment at 3.25% interest for 30-years, the total payment would be $2,420 a month.  During the first year, the average monthly principal reduction is $573 a month which build the owner’s equity in the home.

At an estimated 3% appreciation, this home would increase in value at the rate of $875 a month during the first year which again builds the owner’s equity in the home.

Even if you consider the buyer will now be responsible for repairs and possibly homeowner’s association fees, the monthly net cost of housing in this example is $1,122 or less than half the monthly payment.  The difference goes to equity which a tenant does not benefit from.

If the buyer were paying $2,750 monthly rent, they would be paying $1,628 more each month to rent than to own.  In a year’s time, they would lose $19,500 of equity by continuing to rent.  The down payment in this example is only $12,250 which would leave $7,000 to pay for buyer’s closing costs.

Purchase Price	$350,000
Down Payment	$12,250
Total Monthly Payment (PITI + MIP)	$2,420
Less Monthly Principal Reduction (average first year)	$573
Less Monthly Appreciation (average first year at 3% annually)	$875
Plus Estimated Maintenance & HOA	$175
Net Cost of Housing	$1,122

The equity for the homeowner in this example at the end of seven years would be almost $140,000 based on the appreciation and amortization of the mortgage.  Whether you rent or buy, you pay for the house you occupy.

Use this Rent vs. Own to plug in your own numbers for the price home you’d like to buy.  If you need help with it, contact me and we can do it over the phone at (503) 851-1645 or in an online meeting.

If you would like any professional residential Real Estate advice, contact us at Paramount Real Estate Services.  1008 12th St. SE Salem, OR 97302

Also, to mobilize us right away to help you move, visit us here:

brianandnina.com/buyers

brianandnina.com/sellers

Home Buying-Don’t do it Alone!

Why homebuying begins with the agent

It takes a team of professionals to buy a home like the lender, the appraiser, the inspector, the property insurance agent, the title officer, and others but the real estate professional may play the most critical role.

Baking bread seems so simple.  There are only four ingredients: flour, salt, yeast, and water; yet, there are steps that should be followed as well as a certain sequence to get the proper results.  Some people mix all of the dry ingredients before adding the hot water to activate the yeast.  Other people will activate the yeast in the warm water first to allow it to “bloom.”

Both methods can achieve satisfactory results but one knowledgeable person needs to be in charge of the bread instead of having multiple people to be concerned with just their one ingredient or contribution like mixing, kneading, fermentation, benching, shaping, proofing or baking.

Similarly, in a home purchase, the buyer’s agent can be the one who puts things in the proper order and sees that no steps are missed.  The buyer’s agent coordinates between the other professionals with the common goal of getting the home closed on time according to the terms agreed in the sales contract.

Even if a buyer has been through the process before and possibly, multiple times, the buyer’s agent will most likely have far more experience because it is their job. They perform their job on a daily basis and are not personally or emotionally involved like a buyer is.

Your agent understands what and when the various steps should be done and by whom.  They have worked with enough of the other professionals to know who is good at their job and can offer recommendations.  They have seen the things that make a transaction go smoothly and what can derail one.

Experience is a great teacher, but the lesson does not have to be learned by going through it by yourself.  Take the luxury of using your real estate professional’s experience acquired through years of study and practice.  Allow your agent to advise you and coordinate the efforts to achieve the results you are expecting and deserve.

Learn more about the process and different steps by downloading the Buyers Guide

If you would like any professional residential Real Estate advice, contact us at Paramount Real Estate Services.  1008 12th St. SE Salem, OR 97302  503-851-1645

Also, to mobilize us right away to help you move, visit us here:

brianandnina.com/buyers

brianandnina.com/sellers

Real Estate Numbers Rise for 2013

Existing Home Sales for the nation rose substantially for 2013 giving us the highest numbers that we’ve seen for 7 years.  This is encouraging to say the least, however, many factors still plague our country and the health of our economic recovery.  The United States needs to see more than the 70,000-200,000 private jobs created each month for us to have a strong economic recovery.  It is understood that the national unemployment rate dipped below 7%, but let’s be honest here.   Many people have left the workforce causing this number to look more attractive than it really is.  Many more people need to get back to work and be able to make attractive wages before our economy is not struggling on life support.

Regardless of how our overall economy is, people still need to find homes to live in.  We have witnessed the largest economic correction that the US has had in decades and people still find ways to buy their own home.  This is the resilience and creativity of the American people, which is what should be celebrated.  People are doing what they can to scratch and crawl their way to lending approval because they know the importance of owning their own home.  Taking advantage of the amazingly low interest rates is a strong motivator as well.  Allowing interest rates to rise before locking in that rate will cost a home buyer thousands of dollars over the term of their loan or the time they own the home.  As interest rates continue to rise through 2014, the buyers who are able to purchase now will be the ones creating more of their own wealth over time.  http://data.bls.gov/timeseries/LNS14000000