Buying Your Home - Appraisals & Market ValueWhat is the return on new versus previously owned homes? |
Buying Your Home - Escrow & Closing Costs
How can I save on closing costs?
Studies show that the closing costs, which can average 2 to 3
percent of a total home purchase price, are often more costly than
many buyers expect. But there are some ways to save:
* Negotiate
with the seller to pay all or part of the closing costs. The lender
must agree to this as well as the seller.
* Get a no-point loan.
The trade-off is a higher interest rate on the loan and many of these
loans have prepayment penalties. But buyers who are short on cash and
can qualify for a higher interest rate may find a no-point loan will
significantly cut their closing costs.
* Get a no-fee loan.
Usually, though, these fees are wrapped into a higher interest rate
though it will save you on the amount of cash you need upfront.
* Get seller financing. This kind of arrangement usually does
not entail traditional loan fees or charges.
* Rent the property
in which you are interested with an option to buy. That will give you
more time to save for the upfront cash needed for the actual purchase.
* Shop around for the best loan deal. Each direct lender and each
mortgage brokerage has their own fee structure. Call around before
submitting your final loan application.
Who pays the closing costs?
Closing costs are either paid by the home seller or home buyer.
It often depends on local custom and what the buyer or seller
negotiates.
What are closing costs?
Closing
costs are the fees for services, taxes or special interest charges
that surround the purchase of a home. They include upfront loan
points, title insurance, escrow or closing day charges, document fees,
prepaid interest and property taxes. Unless, these charges are rolled
into the loan, they must be paid when the home is closed.
Where do I get information about closing costs?
For more
on closing costs, ask for the "Consumers Guide to Mortgage Settlement
Costs," Federal Reserve Bank of San Francisco, Public Information
Department, P.O. Box 7702, San Francisco, CA 94120 or call (415)
974-2163.
Why do I need a title report?
As much
as you as a buyer may want to believe that the home you have found is
perfect, a clear title report ensures there are no liens placed
against the prior owners or any documents that will restrict your use
of the property. A preliminary title report provides you with an
opportunity to review any impediment that would prevent clear title
from passing to you. When reading a preliminary report, it is
important to check the extent of your ownership rights or interest.
The most common form of interest is "fee simple" or "fee," which is
the highest type of interest an owner can have in land. Liens,
restrictions and interests of others excluded from title coverage will
be listed numerically as exceptions in the report. You also may
have to consider interests of any third parties, such as easements
granted by prior owners that limit use of the property. Some buyers
attempt to clear these unwanted items prior to purchase. A list
of standard exceptions and exclusions not covered by the title
insurance policy may be attached. This section includes items the
buyer may want to investigate further, such as any laws governing
building and zoning.
Buying Your Home - Finding the Right Home
What are the pros and cons of adding on or buying new?
Before making a choice between adding on to an existing home
or buying a larger one, consider these questions:
* How much
money is available, either from cash reserves or through a home
improvement loan, to remodel your current house?
* How much additional space is required? Would the foundation
support a second floor or does the lot have room to expand on the
ground level?
* What do local zoning and building ordinances
permit?
* How much equity already exists in the property?
* Are there affordable properties for sale that would satisfy
your changing housing needs?
Do we dig deep and buy a dream home or settle for a starter home?
Choosing between a smaller house in an affluent neighborhood,
an older, bigger house in a more working-class community or a
brand-new home is not easy. If you're in this situation, start by
examining your priorities and asking the following questions:
*
Is the surrounding neighborhood or the home itself the most
important consideration?
* Is each of the neighborhoods safe?
* Is quality of the schools an issue?
* Do any of the
areas seem to attract more families with children or adult
residents? And where do you fit in?
As for the return on your investment, home-price appreciation is
hard to predict. In the late 1980s, and again 10 years later, the
more expensive move-up housing appreciated wildly. But during the
recession that followed, smaller homes tended to hold their value
better than more expensive ones.
How do you choose between buying and renting?
Home ownership offers tax benefits as well as the freedom to
make decisions about your home. An advantage of renting is not
worrying about maintenance and other financial obligations
associated with owning property. There also are a number of economic
considerations. Unlike renters, home owners who secure a fixed-rate
loan can lock in their monthly housing costs and make prudent
investment plans knowing these expenses will not increase
substantially. Home ownership is a highly leveraged investment that
can yield substantial profit on a nominal front-end investment.
However, such returns depend on home-price appreciation.
"For some people, owning a home is a great feeling," writes Mitchell A. Levy in his book, "Home Ownership: The American Myth," Myth Breakers Press, Cupertino, Calif.; 1993. "It does, however, have a price. Besides the maintenance headache, the amount of after-tax money paid to the lender is usually greater than the amount of money otherwise paid in rent," Levy concludes.
As for evaluating the risk associated with home ownership, David T.
Schumacher and Erik Page Bucy write in their book "The Buy &
Hold Real Estate Strategy," John Wiley & Sons, New York; 1992,
that "good property located in growth areas should be regarded as an
investment as opposed to a speculation or gamble." The authors
recommend that prospective buyers spend a few months investigating a
community. Many people make the mistake of buying in the wrong area.
"Just because certain properties are high-priced doesn't necessarily
mean they have some inherent advantage," the authors write. "One
property may cost more than another today, but will it still be
worth more down the line?"
How do I get the real scoop on homes I am looking at?
Home inspections, seller disclosure requirements and the
agent's experience will help. Disclosure laws vary by state, but in
some states, the law requires the seller to complete a real estate
transfer disclosure statement. Here is a summary of the things you
could expect to see in a disclosure form:
* In the kitchen -- a range, oven, microwave, dishwasher,
garbage disposal, trash compactor.
* Safety features such as
burglar and fire alarms, smoke detectors, sprinklers, security gate,
window screens and intercom.
* The presence of a TV antenna or
satellite dish, carport or garage, automatic garage door opener,
rain gutters, sump pump.
* Amenities such as a pool or spa,
patio or deck, built-in barbeque and fireplaces.
* Type of
heating, condition of electrical wiring, gas supply and presence of
any external power source, such as solar panels.
* The type of
water heater, water supply, sewer system or septic tank also should
be disclosed.
Sellers also are required to indicate any significant defects or malfunctions existing in the home's major systems. A checklist specifies interior and exterior walls, ceilings, roof, insulation, windows, fences, driveway, sidewalks, floors, doors, foundation, as well as the electrical and plumbing systems. The form also asks sellers to note the presence of environmental hazards, walls or fences shared with adjoining landowners, any encroachments or easements, room additions or repairs made without the necessary permits or not in compliance with building codes, zoning violations, citations against the property and lawsuits against the seller affecting the property.
Also look for, or ask about, settling, sliding or soil problems,
flooding or drainage problems and any major damage resulting from
earthquakes, floods or landslides.
People buying a condominium
must be told about covenants, codes and restrictions or other deed
restrictions. It's important to note that the simple idea of
disclosing defects has broadened significantly in recent years. Many
jurisdictions have their own mandated disclosure forms as do many
brokers and agents. Also, the home inspection and home warranty
industries have grown
What do all of those real estate acronyms in the ads mean?
If you find yourself stumbling over weird acronyms in a real
estate listing, don't be alarmed. There is method to the madness of
this shorthand (which is mostly adopted by sellers to save money in
advertising charges). Here are some abbreviations and the meaning of
each, taken from a recent newspaper classified section:
*
assum. fin. -- assumable financing
* dk -- deck
* gar --
garage (garden is usually abbreviated "gard")
* expansion pot'l
-- may be extra space on the lot, or possibly vertical potential for
a top floor or room addition. Verify actual potential by checking
local zoning restrictions prior to purchase.
* fab pentrm --
fabulous pentroom, a room on top, underneath the roof, that
sometimes has views
* FDR -- formal dining room (not the former
president)
* frplc, fplc, FP -- fireplace
* grmet kit --
gourmet kitchen
* HDW, HWF, Hdwd -- hardwood floors
* hi
ceils -- high ceilings
* In-law potential -- potential for a
separate apartment. Sometimes, local zoning codes restrict rentals
of such units so be sure the conversion is legal first.
* large
E-2 plan -- this is one of several floor plans available in a
specific building
* lsd pkg. -- leased parking area, may come
with an additional cost
* lo dues -- find out just how low
these homeowner's dues are, and in comparison to what?
* nr bst
schls -- near the best schools
* pvt -- private
* pwdr rm
-- powder room, or half-bath
* upr- upper floor
* vw, vu, vws, vus -- view(s)
* Wow! -- better check
this one out.
Buying Your Home - Foreclosures
Do you have to buy HUD homes through a realty agent?
You can only purchase a U.S. Department of Housing and Urban
Development property through a licensed real estate broker. HUD will
pay the broker's commission up to 6 percent of the sales price.
Are foreclosures an option?
A foreclosure
property is a home that has been repossessed by the lender because
the owners failed to pay the mortgage. Thousands of homes end up in
foreclosure every year. Economic conditions affect the number of
foreclosures, too. Many people lose their homes due to job loss,
credit problems or unexpected expenses. It is wise to be
cautious when considering a foreclosure. Many experts, in fact,
advise inexperienced buyers to hire an expert to take them through
the process. It is important to have the house thoroughly inspected
and to be sure that any liens, undisclosed mortgages or court
judgments are cleared or at least disclosed.
What types of foreclosure are there?
Judicial foreclosure action is a proceeding in which a
mortgagee, a trustee or another lienholder on property requests a
court- supervised sale of the property to cover the unpaid balance
of a delinquent debt. Nonjudicial foreclosure is the process
of selling real property under a power of sale in a mortgage or deed
of trust that is in default. In such a foreclosure, however, the
lender is unable to obtain a deficiency judgment, which makes some
title insurance companies reluctant to issue a policy.
How do you find government-repossessed homes?
The U.S. Department of Housing and Urban Development acquires
properties from lenders who foreclose on mortgages insured by HUD.
These properties are available for sale to both homeowner-occupants
and investors. You can only purchase HUD-owned properties through a
licensed real estate broker. HUD will pay the broker's commission up
to 6 percent of the sales price. Down payments vary depending on
whether the property is eligible for FHA insurance. If not, payments
range from the conventional market's 5 to 20 percent. One caution.
HUD homes are sold "as is," meaning limited repairs have been made
made but no structural or mechanical warranties are implied.
Can I get a HUD home for as little as $100 down?
If you are strapped for cash and looking for a bargain, you may be
able to buy a foreclosure property acquired by the U.S. Department
of Housing and Urban Development for as little as $100 down. With
HUD foreclosures, down payments vary depending on whether the
property is eligible for FHA insurance. If not, payments range from
5 to 20 percent. But when the property is FHA-insured, the down
payment can go much lower. Each offer must be accompanied by
an "earnest money" deposit equal to 5 percent of the bid price, not
to exceed $2,000 but not less than $500. The U.S. Department of
Veterans Affairs also offers foreclosure properties which can be
purchased directly from the VA often well below market value and
with a down payment amount as low as 2 percent for owner-occupants.
Investors may be required to pay up to 10 percent of the purchase
price as a down payment. This is because the VA guarantees home
loans and often ends up owning the property if the veteran defaults.
If you are interested in purchasing a VA foreclosure, call 1-800-827-1000 to request a current listing. About 100 new properties are listed every two weeks. You should be aware that foreclosure properties are sold "as is," meaning limited repairs have been made but no structural or mechanical warranties are implied.
Where can you find foreclosures?
In most states, a foreclosure notice must be published in the
legal notices section of a local newspaper where the property is
located or in the nearest city. Also, foreclosure notices are
usually posted on the property itself and somewhere in the city
where the sale is to take place. When a homeowner is late on three
payments, the bank will record a notice of default against the
property. When the owner fails to pay up, a trustee sale is held,
and the property is sold to the highest bidder. The financial
institution that has initiated foreclosure proceedings usually will
set the bid price at the loan amount. Despite these seemingly
straightforward rules, buying foreclosures is not easy as it may
sound. Sophisticated investors use the technique so novices may find
themselves among stiff competition.
What happens at a trustee sale?
Trustee sales are advertised in advance and require an
all-cash bid. The sale is usually conducted by a sheriff, a
constable or lawyer acting as trustee. This kind of sale, which
usually attracts savvy investors, is not for the novice. In a
trustee sale, the lender who holds the first loan on the property
starts the bidding at the amount of the loan being foreclosed.
Successful bidders receive a trustee's deed.
Where do I learn about HUD foreclosures?
One good source is their Web page
https://www.hud.gov.
What are problems buying foreclosures?
Buying directly at a legal foreclosure sale is risky and
dangerous. It is strictly caveat emptor ("Let the buyer beware").
The process has many disadvantages. There is no financing; you need
cash and lots of it. The title needs to be checked before the
purchase or the buyer could buy a seriously deficient title. The
property's condition is not well known and an interior inspection of
the property may not be possible before the sale, says James I.
Wiedemer, author of "The Smart Money Guide Bargain Homes, How to
Find and Buy Foreclosures." In addition, only estate (probate) and
foreclosure sales are exempt from some states disclosure laws. In
both cases, the law protects the seller (usually an heir or
financial institution) who has recently acquired the property
through adverse circumstances and may have little or no direct
information about it.
What about buying a foreclosure "as is"?
Buying a foreclosure property can be risky, especially for the
novice. Usually, you buy a foreclosure property as is, which means
there is no warranty implied for the condition of the property (in
other words, you can't go back to the seller for repairs). The
condition of foreclosure properties is usually not known because an
inspection of the interior of the house is not possible before the
sale. In addition, there may be problems with the title, though that
is something you can check out before the purchase.
How do you get financing for a foreclosure?
One reason there are few bidders at foreclosure sales is that
it is next to impossible to get financing for such a property. You
generally need to show up with cash and lots of it, or a line of
credit with your bank upon which you can draw cashier's checks.
Buying Your Home - Home Inspections & Warranties
Buying Your Home - Home Inspections & Warranties
Do I need a home inspection?
Yes. Buying a home "as is" is a risky proposition. Major
repairs on homes can amount to thousands of dollars. Plumbing,
electrical and roof problems represent significant and complex
systems that are expensive to fix.
How do I find a home inspector?
Your realty agent is one source. But keeping them independent
from the agent may be a good idea. Inspectors are listed in the
yellow pages. You can ask for referrals from friends. Ask for their
credentials, such as contractor's license or engineering
certificate. Also, check out their references.
How do I find a home inspector?
In order to find a home inspector, Dian Hymer, author of
"Buying and Selling a Home A Complete Guide," Chronicle Books, San
Francisco; 1994, advises looking for someone with demonstrable
qualifications. "Ideally, the general inspector you select should be
either an engineer, an architect, or a contractor. When possible,
hire an inspector who belongs to one of the home inspection trade
organizations."
The American Society of Home Inspectors (ASHI) has developed formal inspection guidelines and a professional code of ethics for its members. Membership to ASHI is not automatic; proven field experience and technical knowledge of structures and their various systems and appliances are a prerequisite. One can usually find an inspector by looking in the phone book or by inquiring at a real estate office or sometimes at an area Realtor association. Rates for the service vary greatly. Many inspectors charge about $400, but costs go up with the scope of the inspection.
What's a home inspection?
A home inspection is when a paid professional inspector --
often a contractor or an engineer -- inspects the home, searching
for defects or other problems that might plague the owner later on.
They usually represent the buyer and or paid by the buyer. The
inspection usually takes place after a purchase contract between
buyer and seller has been signed.
Buying Your Home - Making an Offer
Can you buy homes below market?
While a typical buyer may look at five to 10 homes before making
an offer, an investor who makes bargain buys usually goes through many
more. Most experts agree it takes a lot of determination to find a
real "bargain." There are a number of ways to buy a bargain property:
*Buy a fixer-upper in a transitional neighborhood, improve it and
keep it or resell at a higher price.
* Buy a foreclosure
property (after doing your research carefully).
* Buy a house
due to be torn down and move it to a new lot.
* Buy a partial
interest in a piece of real estate, such as part of a tenants-
in-common partnership.
* Buy a leftover house in a new-home
development.
What is the difference between list and sales prices?
The list price is how much a house is advertised for and is
usually only an estimate of what a seller would like to get for the
property. The sales price is the amount a property actually sells for.
It may be the same as the listing price, or higher or lower, depending
on how accurately the property was originally priced and on market
conditions. If you are a seller, you may need to adjust the listing
price if there have been no offers within the first few months of the
property's listing period.
Are low-ball offers advisable?
A low-ball offer is a term used to describe an offer on a house
that is substantially less than the asking price. While any offer can
be presented, a low-ball offer can sour a prospective sale and
discourage the seller from negotiating at all. Unless the house is
very overpriced, the offer will probably be rejected. You should
always do your homework about comparable prices in the neighborhood
before making an y offer. It also pays to know something about the
seller's motivation. A lower price with a speedy escrow, for example,
may motivate a seller who must move, has another house under contract
or must sell quickly for other reasons.
What is the difference between list price, sales price and
appraised value?
The list price is a seller's advertised price, a figure that
usually is only a rough estimate of what the seller wants to get.
Sellers can price high, low or close to what they hope to get. To
judge whether the list price is a fair one, be sure to consult
comparable sales prices in the area. The sales price is the amount of
money you as a buyer would pay for a property. The appraisal value is
a certified appraiser's estimate of the worth of a property, and is
based on comparable sales, the condition of the property and numerous
other factors.
Is a low offer a good idea?
While your low offer in a normal market might be rejected
immediately, in a buyer's market a motivated seller will either accept
or make a counteroffer. Full-price offers or above are more likely to
be accepted by the seller. But there are other considerations
involved:
* Is the offer contingent upon anything, such as the
sale of the buyer's current house? If so, a low offer, even at full
price, may not be as attractive as an offer without that condition.
* Is the offer made on the house as is, or does the buyer want the
seller to make some repairs or lower the price instead?
* Is the
offer all cash, meaning the buyer has waived the financing
contingency? If so, then an offer at less than the asking price may be
more attractive to the seller than a full-price offer with a financing
contingency.
What contingencies should be put in an offer?
Most offers include two standard contingencies: a financing
contingency, which makes the sale dependent on the buyers' ability to
obtain a loan commitment from a lender, and an inspection contingency,
which allows buyers to have professionals inspect the property to
their satisfaction. A buyer could forfeit his or her deposit under
certain circumstances, such as backing out of the deal for a reason
not stipulated in the contract. The purchase contract must include the
sellers responsibilities, such things as passing clear title,
maintaining the property in its present condition until closing and
making any agreed-upon repairs to the property.
Who gets the furnishings when a home is sold?
It depends. Fixtures, any kind of personal property that is
permanently attached to a house (such as drapery rods, built-in
bookcases, tacked-down carpeting or a furnace) automatically stay with
the house unless specified otherwise in the sales contract. But
anything that is not nailed down is negotiable. This most often
involves appliances that are not built in (washer, dryer,
refrigerator, for example), although some sellers will be interested
in negotiating for other items, such as a piano.
Whose obligation is it to disclose pertinent information about a
property?
In most states, it is the seller, but obligations to disclose
information about a property vary. Under the strictest laws, you and
your agent, if you have one, are required to disclose all facts
materially affecting the value or desirability of the property which
are known or accessible only to you. This might include: homeowners
association dues; whether or not work done on the house meets local
building codes and permits requirements; the presence of any
neighborhood nuisances or noises which a prospective buyer might not
notice, such as a dog that barks every night or poor TV reception; any
death within three years on the property; and any restrictions on the
use of the property, such as zoning ordinances or association rules.
It is wise to check your state's disclosure rules prior to a home
purchase.
How do you determine the value of a troubled property?
Buyers considering a foreclosure property should obtain as much
information as possible from the lender, including the range of bids
expected. 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. It also is possible to do
your own cost comparison through researching comparable properties
recorded at local county recorder's and assessor's offices, or through
Internet sites specializing in property records.
What are some tips on negotiation?
The more you know about a seller's motivation, the stronger a
negotiating position you are in. For example, seller who must move
quickly due to a job transfer may be amenable to a lower price with a
speedy escrow. Other so-called "motivated sellers" include people
going through a divorce or who have already purchased another home.
Remember, that the listing price is what the seller would like
to receive but is not necessarily what they will settle for. Before
making an offer, check the recent sales prices of comparable homes in
the neighborhood to see how the seller's asking price stacks up. Some
experts discourage making deliberate low-ball offers. While such an
offer can be presented, it can also sour the sale and discourage the
seller from negotiating at all.
Do I need an attorney when I buy a house?
In some states, you do need an attorney to complete a real
estate transaction, but in others you do not. Most home buyers are
capable of handling routine real estate purchase contracts as long as
they make certain they read the fine print and understand all the
terms of the contract. In particular, you should be clear on the terms
of any contingency clauses that will allow them to back out of the
contract. If you have any questions at all, it may be advisable to
consult an attorney to avoid future legal hassles. In looking for an
attorney, ask friends for recommendations or ask your real estate
agent to recommend several. Call to inquire about fees and to check on
their experience. In general, more experienced attorneys will cost
more, but real estate fees as a rule are small relative to the cost of
the property you are buying.
What are the standard contingencies?
Most purchase offers include two standard contingencies: a
financing contingency, which makes the sale dependent on the buyers'
ability to obtain a loan commitment from a lender, and an inspection
contingency, which allows buyers to have professionals inspect the
property to their satisfaction. As a buyer, you could forfeit your
deposit under certain circumstances, such as backing out of the deal
for a reason not stipulated in the contract. The purchase contract
must include the sellers responsibilities, such things as passing
clear title, maintaining the property in its present condition until
closing and making any agreed-upon repairs to the property.
Buying Your Home - Property Taxes
Are taxes on second homes deductible?
Mortgage interest and property taxes are deductible on a second
home if you itemize. Check with your accountant or tax adviser for
specifics.
Do all loans require impound accounts?
If you are taking out a FHA or VA loan, the lender can require an
impound account to pay real estate taxes and hazard insurance
premiums, as with a standard loan. Most conventional loans do not
require an impound account.
Are property taxes deductible?
Property taxes on all real estate, including those levied by
state and local governments and school districts, are fully deductible
against current income taxes.
Where can I learn more about appealing my property taxes?
Contact your local tax assessor's office to see what procedures
to follow to appeal your property tax assessment. You may be able to
appeal your assessment informally. Mostly likely, however, you
will have to go through a formal tax-appeal processes, which begin
with an appeal filed with the appropriate assessment appeals board.
How do property taxes work?
Property taxes are
what most homeowners in the United States pay for the privilege of
owning a piece of real estate, on average 1.5 percent of the
property's current market value. These annual local assessments by
county or local authorities help pay for public services and are
calculated using a variety of formulas.
What is an impound account?
An impound account is a trust account established by the lender
to hold money to pay for real estate taxes, and mortgage and
homeowners insurance premiums as they are received each month.
How is a home's value determined?
You have several
ways to determine the value of a home. An appraisal is a professional
estimate of a property's market value, based on recent sales of
comparable properties, location, square footage and construction
quality. This service varies in cost depending on the price of the
home. On average, an appraisal costs about $300 for a $250,000 house.
A comparative market analysis is an informal estimate of market value
performed by a real estate agent based on similar sales and property
attributes. Most agents offer free analyses in the hopes of winning
your business. You also can get a comparable sales report for a fee
from private companies that specialize in real estate data or find
comparable sales information available on various real estate Internet
sites.
Buying Your Home - Tax Considerations
Buying Your Home - Tax Considerations
Where do I get information on IRS publications?
The Internal Revenue Service publishes a number of real estate
publications. They are listed by number:
* 521 "Moving Expenses"
* 523 "Selling Your Home"
* 527 "Residential Rental Property"
* 534 "Depreciation"
* 541 "Tax Information on Partnerships"
* 551 "Basis of Assets"
* 555 "Federal Tax Information on
Community Property"
* 561 "Determining the Value of Donated
Property"
* 590 "Individual Retirement Arrangements"
* 908
"Bankruptcy and Other Debt Cancellation"
* 936 "Home Mortgage
Interest Deduction"
Order by calling 1-800- TAX-FORM.
Are seller-paid points deductible?
As of Jan. 1, 1991,
homeowners have been able to deduct points paid by the seller. This
deduction previously was reserved only for points actually paid by the
buyer.
When is the best time to buy?
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.
What home-buying costs are deductible?
Any points you or the seller pay to purchase your home loan are
deductible for that year. Property taxes and interest are deductible
every year. But while other home-buying costs (closing costs in
particular) are not immediately tax-deductible, they can be figured
into the adjusted cost basis of your home when you go to sell (any
significant home improvements also can be calculated into your basis).
These fees would include title insurance, loan-application fee, credit
report, appraisal fee, service fee, settlement or closing fees, bank
attorney's fee, attorney's fee, document preparation fee and recording
fees. Points paid when you refinance an existing mortgage must be
deducted ratably over the life of the new loan.
What is the Mortgage Credit Certificate program?
The Mortgage Credit Certificate program allows first-time home
buyers to take advantage of a special federal income tax credit. This
program allows buyers credit in qualifying for the tax advantage
they'll receive after they purchase the home. The amount of the credit
is tied to a local formula that every city with an MCC program must
follow. A MCC credit, which can total $2,000 or more, reduces the
borrower's federal tax liability by an amount tied to how much one
pays in annual mortgage interest. Both the borrower's income and the
purchase price of the home must fall within established guidelines. To
see if your community has an MCC program, call your local housing or
redevelopment agency. You also may inquire with your real estate
broker or the local association of Realtors.
What are the rules for mortgage credit certificates?
To qualify for a mortgage credit certificate, both your income
and the purchase price of the home must fall within established city
guidelines. These guidelines vary by city but generally only permit
people who earn an average income or slightly higher than average
income. A limited number of cities have authorized the MCC program.
Contact your municipal housing department for more information.
Should I buy a vacation home?
Today a vacation
home can be purchased for investment purposes as well as enjoyment.
And yes, there are tax benefits. Some people buy a vacation home with
the idea of turning it into a permanent retirement home down the road,
which puts them ahead on their payments. Another benefit is that the
interest and property taxes are tax deductible, which helps to offset
the cost of paying for a second home. A vacation home also can be
depreciated if you live in it fewer than 14 days a year, or 10 percent
of the rented days - whichever is greater.
Resources:
* "Real Estate Investing From A to Z," William Pivar,
Probus Publishing, Chicago; 1993.
* "The Ultimate Language of
Real Estate,'' John Reilly, Dearborn Financial
How do I save on taxes?
Here are some ways to save money on taxes:
* Mortgage
interest on loans up to $1 million is completely deductible for the
year in which you pay it to buy, build or improve your principal
residence plus a second home.
* Points, or loan origination
fees, also are deductible no matter who pays them, the buyer or the
seller.
* Most homeowners, except the wealthy and those living
in high-priced markets, no longer need to worry about capital gains
taxes. The exemption has been raised to $500,000 for married couples
and $250,000 for single owners. It can be taken every two years.
Homeowners should always keep all receipts of permanent home
improvements and of mortgage closing costs. If you do have to pay
capital gains taxes, these costs can be added to your adjusted cost
basis. Consult your tax adviser for more information.
Resources:
* "Tax Information for First-Time Homeowners," IRS
Publication 530, and "Selling Your Home," IRS Publication 523. Call
(800) TAX-FORM to order.
Are taxes on second homes deductible?
Mortgage interest and property taxes are deductible on a second
home if you itemize. Check with your accountant or tax adviser for
specifics.
Are points deductible?
If you are a
buyer, and you or the seller pays points, they are deductible for the
year in which they are paid only. You also can deduct any points you
pay when you refinance your home, but you must do so ratably over the
life of the loan. Consult your tax or financial advisor.
How do you choose between buying and renting?
Home ownership offers tax benefits as well as the freedom to
make decisions about your home. An advantage of renting is not
worrying about maintenance and other financial obligations associated
with owning property. There also are a number of economic
considerations. Unlike renters, home owners who secure a fixed-rate
loan can lock in their monthly housing costs and make prudent
investment plans knowing these expenses will not increase
substantially. Home ownership is a highly leveraged investment that
can yield substantial profit on a nominal front-end investment.
However, such returns depend on home-price appreciation.
"For some people, owning a home is a great feeling," writes Mitchell
A. Levy in his book, "Home Ownership: The American Myth," Myth
Breakers Press, Cupertino, Calif.; 1993. "It does, however, have a
price. Besides the maintenance headache, the amount of after-tax money
paid to the lender is usually greater than the amount of money
otherwise paid in rent," Levy concludes. As for evaluating the
risk associated with home ownership, David T. Schumacher and Erik Page
Bucy write in their book "The Buy & Hold Real Estate Strategy,"
John Wiley & Sons, New York; 1992, that "good property located in
growth areas should be regarded as an investment as opposed to a
speculation or gamble." The authors recommend that prospective buyers
spend a few months investigating a community. Many people make the
mistake of buying in the wrong area. "Just because certain properties
are high-priced doesn't necessarily mean they have some inherent
advantage," the authors write. "One property may cost more than
another today, but will it still be worth more down the line?"
Are there tax credits for first-time home buyers?
Many city and county governments offer Mortgage Credit Certificate
programs, which allow first-time home buyers to take advantage of a
special federal income tax write-off, which makes qualifying for a
mortgage loan easier. Requirements vary from program to program.
People wanting to apply should contact their local housing or
community development office. Here is a list of four general
requirements to keep in mind:
* Some credit may be claimed only
on your owner- occupied principal residence.
*There are maximum
income limits, which vary by locality and family size.
* You
must be a first-time home buyer, which means you must not have had any
kind of ownership interest in a principal residence during the past
three years. This restriction may be waived, however, if you are
buying property within certain target areas.
* Allocations must be available. A local MCC program may have to
decline new applications when it runs out of funds.
Explain the home mortgage deduction . .
The mortgage interest deduction entitles you to completely
deduct the interest on your home loan for the year in which you paid
it. Mortgage interest is not a dollar-for-dollar tax cut; it reduces
taxable income. You must itemize deductions in order to do this, which
means your total deductions must exceed the IRS's standard deduction.
Another point to remember is that the amount of interest on your loan
goes down each year you pay on your mortgage (all standard home-loan
formulas pay off interest first before significantly paying into
principal). That's why paying extra on your principal every year can
help you pay off your loan early.
How are fees and assessments figured in a homeowners association?
Homeowners association fees are considered personal living
expenses and are not tax-deductible. If, however, an association has a
special assessment to make one or more capital improvements, condo
owners may be able to add the expense to their cost basis. Cost basis
is a term for the money an owner spends for permanent improvements
throughout their time in the home and is used to reduce eventual
capital gains taxes when the property is sold. For example, if the
association puts a new roof on a building, the expense could be
considered part of a condo owner's cost basis only if they lived
directly underneath it. Overall improvements to common areas, such as
the installation of a swimming pool, need to be considered on a
case-by-case basis but most can be included in the cost basis of any
owner who can show their home directly benefits from the work.
To find out more about how the IRS views condo association fees, look to IRS Publication 17, "Your Federal Income Tax," which includes a section on condos. Order a free copy by calling (800) TAX-FORM.
How do I reach the IRS?
To reach the Internal Revenue Service, call (800) TAX-1040.
Buying Your Home - What You Can Afford
How much does my real estate agent need to know?
Real estate agents would say that the more you tell them, the better they
can negotiate on your behalf. However, the degree of trust you have with
an agent may depend upon their legal obligation. Agents working for buyers
have three possible choices: They can represent the buyer exclusively,
called single agency, or represent the seller exclusively, called sub-
agency, or represent both the buyer and seller in a dual-agency situation.
Some states require agents to disclose all possible agency relationships
before they enter into a residential real estate transaction. Here is a
summary of the three basic types:
* In a traditional
relationship, real estate agents and brokers have a fiduciary
relationship to the seller. Be aware that the seller pays the
commission of both brokers, not just the one who lists and shows the
property, but also to the sub- broker, who brings the ready, willing
and able buyer to the table.
* Dual agency exists if two agents
working for the same broker represent the buyer and seller in a
transaction. A potential conflict of interest is created if the
listing agent has advance knowledge of another buyer's offer.
Therefore, the law states that a dual agent shall not disclose to the
buyer that the seller will accept less than the list price, or
disclose to the seller that the buyer will pay more than the offer
price, without express written permission.
* A buyer also can
hire his or her own agent who will represent the buyer's interests
exclusively. A buyer's agent usually must be paid out of the buyer's
own pocket but the buyer can trust them with financial information,
knowing it will not be transmitted to the other broker and ultimately
to the seller.
How much will I spend on maintenance expenses?
Experts generally agree that you can plan on annually spend 1 percent of
the purchase price of your house 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.
What is the standard debt-to-income ratio?
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 -- and still promptly make 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.
What can I afford?
Know what you can afford is the first rule of
home buying, and that 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 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.
When is the best time to buy?
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.
Where do I get information on housing market stats?
A real estate agent is a good source for finding out the status of the
local housing market. So is your statewide association of Realtors, most
of which are continuously compiling such statistics from local real estate
boards. For overall housing statistics, 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.; call (800) 755-6269 for information;
the firm also maintains an Internet site. Finally, check with the U.S.
Bureau of the Census in Washington, D.C.; (301) 763-2422. 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." Write Chicago Title
and Trust Family of Title Insurers, 171 North Clark St., Chicago,
IL 60601-3294.
What is Fannie Mae's low-down program?
Fannie Mae is expanding the availability of low-down-payment loans in an
effort to help more people nationwide qualify for a mortgage. Two new programs
will help potential buyers overcome two of the most common obstacles to
home ownership, low savings and a modest income. To address many first-time
buyers' struggles to save the down payment, Fannie Mae developed Fannie
97. The program provides 97 percent financing on a fixed-rate mortgage
with either a 25- 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 5 percent down payment who are at any income level. Yet applicants do
not need as much income to qualify and less cash for closing than 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.
How long do bankruptcies and foreclosures stay on a credit report?
Bankruptcies and foreclosures can remain on a credit report for seven to
10 years. Some lenders will consider an borrower earlier if they have 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 probably will be less
inclined to be flexible.
How do you determine the value of a troubled property?
Buyers considering a foreclosure property should obtain as much information
as possible from the lender, including the range of bids expected. 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.
It also is possible to do your own cost comparison through researching
comparable properties recorded at local county recorder's and assessor's
offices, or through Internet sites specializing in property records.
Buying Your Home - Working With a Real Estate Agent
Can I use an agent for a new home?
Yes, however buyers should be aware of the differences inherent
in working with sales agents who are employed by the developer, rather
than traditional real estate agents.
Builders commonly require
that an outside agent be present, and sign in, the first time a
prospective purchaser visits a site before payment of commission even
is discussed. At times when buyers use an advertisement to find
the development themselves first, builders can refuse to pay any
commission regardless of how helpful an agent may become later in the
process. It is advisable to call the development first and inquire
about their policy on compensating real estate agents if you are using
one.
How do I find a real estate agent?
Getting
a recommendation from a friend or work colleague is an excellent way
to find a good agent. Be sure to ask if they would use the agent
again. You also can call the managers of reputable real estate firms
and ask them for recommendations of agents who have worked in your
neighborhood. In any case, whether you are a buyer or a seller, you
should interview at least three agents to give yourself a choice. A
good agent typically works full-time and has several years of
experience. If you are a seller, you should expect to review a
comparative market analysis, which includes recent home sale prices in
your area, when you talk to a prospective agent.
What about a buyer's agent?
In many states, it's now common for an agent to represent the
buyers exclusively in the transaction and be paid a commission by the
sellers. More and more buyers are going a step further, hiring and
paying for their own agent, referred to as buyers brokers.
How do you find a good agent?
Getting a recommendation
from a friend or work colleague is an excellent way to find a good
agent, whether you are a buyer or a seller. Be sure to ask if they
would use the agent again. You also can call the managers of reputable
real estate firms and ask them for recommendations of agents who have
worked in your neighborhood.
A good agent typically works
full-time and has several years of experience at minimum. If you are a
buyer, you don't usually pay for your agent's services (in the form of
a commission, or percentage of the sales price of the home). All
agents in a transaction usually are paid by the seller from the sales
proceeds. In many states, this means that your agent legally is acting
as a subagent of the seller. But in some states, it's legal for an
agent to represent the buyers exclusively in the transaction and be
paid a commission by the sellers. You also can hire and pay for your
own agent, known as buyer's brokers, whose legal obligation is
exclusively to you. If you are a seller, you should interview at least
three agents, all of whom should make a sales presentation including a
comparative market analysis of local home prices in your area. The
best choice isn't always the agent with the highest asking price for
your home. Be sure to evaluate all aspects of the agent's marketing
plan and how well you think you can work with the individual.
How much does my real estate agent need to know?
Real estate agents would say that the more you tell them, the
better they can negotiate on your behalf. However, the degree of trust
you have with an agent may depend upon their legal obligation. Agents
working for buyers have three possible choices: They can represent the
buyer exclusively, called single agency, or represent the seller
exclusively, called sub- agency, or represent both the buyer and
seller in a dual-agency situation. Some states require agents to
disclose all possible agency relationships before they enter into a
residential real estate transaction. Here is a summary of the three
basic types:
* In a traditional relationship, real estate agents
and brokers have a fiduciary relationship to the seller. Be aware that
the seller pays the commission of both brokers, not just the one who
lists and shows the property, but also to the sub- broker, who brings
the ready, willing and able buyer to the table.
* Dual agency
exists if two agents working for the same broker represent the buyer
and seller in a transaction. A potential conflict of interest is
created if the listing agent has advance knowledge of another buyer's
offer. Therefore, the law states that a dual agent shall not disclose
to the buyer that the seller will accept less than the list price, or
disclose to the seller that the buyer will pay more than the offer
price, without express written permission.
* A buyer also can
hire his or her own agent who will represent the buyer's interests
exclusively. A buyer's agent usually must be paid out of the buyer's
own pocket but the buyer can trust them with financial information,
knowing it will not be transmitted to the other broker and ultimately
to the seller.
Where can I get information on buyer agents?
For information on buyer agents, contact the your area's
Realtor association or National Association of Exclusive Buyers
Agents: 320 West Sabal Palm Place, Suite 150, Longwood, FL 32779.
Phone: 407-767-7700, Toll-Free: 800-986-2322, FAX: 407-834-4747,
WEBSITE: www.naeba.org.