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Objective 2.03 Analyze financial and legal aspects of home ownership.

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1 Objective 2.03 Analyze financial and legal aspects of home ownership

2 So you want to buy a house… mortgage In order to buy a home most people will need to borrow money. This is called a mortgage A mortgage is a contract outlining the terms of a loan between the lender and the borrower.

3 Fixed Rate Mortgages (interest rate and monthly payment are constant) 1.Conventional: 1.Conventional: borrower pays a fixed interest rate for the length of the loan 2.FHA-insured: 2.FHA-insured: guarantees mortgages made by the bank to people with low-medium credit – FHA = Federal Housing Administration 3.VA loan: 3.VA loan: buyers who serve or have served in the military may qualify for a loan guaranteed by the Veterans Administration 4.Terms of Loans: 4.Terms of Loans: loans are repaid monthly over a term of 15-30 years.

4 Estimating What You Can Afford two-and-one-half times gross income Multiply two-and-one-half times your annual gross income (income before deductions) – Gross income X 2.5 = price of house you can afford down payment Buyers must also have a down payment of at least 5%. This is a part of the purchase price that must be paid in cash!

5 Down Payment Calculation Example: $72,000 with 10% down payment – Cost of house = $72,000.00 – 10% down payment = $7200 – Amount to finance = $64,800 Example: $72,000 with 20% down payment – Cost of house = $72,000.00 – 20% down payment = $14,400.00 – Amount to finance = $57,600.00 Larger the down payment, the smaller the mortgage!

6 Qualifying for a Loan 1.Housing to Income Ratio 1.Housing to Income Ratio: ALL of your housing costs should equal no more than 28% of your gross monthly income. – Includes mortgage payment, property taxes, insurance, utilities, repairs, maintenance 2.Debt to Income Ratio: 2.Debt to Income Ratio: Monthly housing costs plus other long-term debts should total no more than 36% of your gross monthly income. – Long-term debts are those that take longer than 10 months to repay 3.BOTH 3.BOTH ratios must be met to qualify for a loan!

7 Stop here

8 The Purchasing Process 1.Agreement of sale: – Also called a purchase agreement, sales agreement, or contract of purchase – Legal agreement between the seller and the buyer – States all the conditions of the sale.

9 2.Earnest Money: – Money – Money a potential buyer pays to show that they are serious about buying a home – Money is held and applied to the cost of the house or refunded if the buyer cannot get a loan.

10 3.Abstract of title: title search – Also called a title search – A search of public records to make sure the seller is the true owner of the house – Makes sure there are no debts on the house 4.Survey: – Makes sure property lines are accurate.

11 5.Inspections: – General home inspection – General home inspection (roof, heating and cooling systems, structural problems, safety issues) – Termite inspection 6.Secure a mortgage – Now, most buyers will become for a mortgage. – Now, most buyers will become pre- approved for a mortgage.

12 7.Closing: ownership of the property – Closing is when the buyer takes ownership of the property – It involves the seller, the buyer, lawyers, and real estate agents – Closing costs – Closing costs are paid. This is cash paid by the buyer to cover the legal and financial costs of purchasing a home.

13 Closing costs Closing costs can include: – Origination fees – Origination fees: fee paid to the lender for processing the loan; usually 1% of mortgage – Appraisal fee: – Appraisal fee: fee paid for determining the value of the property – Other fees escrow – Other fees for lawyers, real estate agents, etc. Some of the money will be held in escrow - money held in trust by a third party until a specified time - usually for property taxes and insurance.

14 Advantages of Owning a Home Sense of freedom and independence Financial advantages: – Helps establish a good credit record in order to qualify for future loans – Interest and property taxes are deductible – Houses usually increase in value – this is called equity.

15 Equity Example – Mary owns a house. She currently owes $90,000 on her mortgage. She has decided to sell her house and buy a new one – Mary’s real estate agent sells Mary’s house for $140,000 (market value) – Mary paid off her mortgage of $90,000 – How much money did Mary make when she sold her house? equity. – Mary made $50,000. This is called equity. – Mary used her equity as a down payment on a new home.

16 Disadvantages of Owning a Home Strain on finances- property taxes, insurance, and maintenance Uses up lots of your free time Foreclosure if you get behind on monthly payments Limited mobility.

17 Property Virgins: “Danish Modern”“Danish Modern”

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