First-time Homebuyer

Becoming a First-Time Homebuyer

Home ownership isn’t right for everyone, but it can be a great investment and provide a huge sense of satisfaction. Before you cross home ownership off your list because you don’t think you can afford it, let me tell you what it takes.

The median house price in the Ukiah Valley is about $425,000. Since you probably don’t have that kind of cash lying around, you’ll need a home loan . The good news is that many first-time-homebuyer loan programs require little or no money for a down payment, making this whole adventure a lot more doable.

In recent weeks, the annual percentage rate for a 30-year, fixed-rate mortgage with little or no money down has been in the neighborhood of 6 percent. That means, you’ll need about $3,000 a month to pay the principal, interest, taxes, homeowner’s insurance, and mortgage insurance. You’ll also need an additional $500 a month for home repairs and upkeep.

That additional $500 a month should go into a savings account each month and only be used for the inevitable expenses that come with home ownership. At some point, you’ll need to paint your home inside and out, patch the roof, replace the water heater, and buy new appliances. You’ll need to replace carpeting, fix windows, and if you have children, you’ll have reupholster your favorite easy chair to get rid of the Silly Putty. If you’re lucky, these repairs won’t all be necessary at once, but I can guarantee they’re coming eventually.

So how much income do you need to earn to be able to buy a median-priced house? Your total household income needs to be about $100,000 a year. If both contributors make the same amount, they each need to be employed full time making about $25 per hour.

And as you might imagine, reportable income is not the only requirement to get a loan. You need good credit (a credit score in the mid 600s) and job stability. Lenders want to do everything possible to assure that you can make your monthly payments, now and in the future.

To rent this same house, rather than spending $2800-3500 per month, you would pay closer to $1500-1700 per month. Of course, once that $1500 is spent, it’s gone. You are not building any equity. So although renting is a bargain, keep in mind there are more issues to consider than just the monthly cost. During the last 50 years, home ownership has created more wealth in the U.S. than any other investment.

And owning your own home has benefits that go beyond financial. Pounding a nail wherever you want doesn’t require anyone else’s permission. You can replace the lawn with a vegetable garden or rip out ugly bushes for an unobstructed view of your kids playing in the yard. You can allow your teen to paint her bedroom purple, knowing you can paint over it when she heads off to college. And your elbow grease benefits YOU.

When you rent, your home can be sold out from under you at any time, forcing you to find a new place to live in a market with very few homes available. For many, the tradeoffs make home ownership worth the expense. If you think you might be able to purchase a home, and you’d like to learn more, call your local Realtor and they can help you figure it out.

Before I go, I wanted to mention an issue facing local homeowners and renters alike. The water in our region depends in large part on the Potter Valley Water Project. PG&E has owned the hydroelectric project for years, but it looks like they’re selling. If the future owners are not good stewards, the water that irrigates our crops and provides our drinking water could be at risk from Potter Valley to Healdsburg. Visit www.pottervalleywater.org to learn more.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.comDick Selzer is a real estate broker who has been in the business for more than 40 years.

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Tired of Renting? Now’s a Great Time to Buy!

Many renters are under the mistaken impression that they cannot afford to buy a house. Some believe they need a substantial down payment; others believe they cannot afford the monthly expenses of home ownership. While these assumptions may be true, it’s best to review the facts before crossing home ownership off your list.

We’ll assume you’re a first-time homebuyer interested in buying a $380,000 home in Ukiah’s Oak Manor subdivision. You don’t have money for a down payment, but you do have a job and good credit. You’ve been paying $1800 per month for rent, but you could afford a little more.

Here’s the good news: FHA loans do not require a large down payment (typically 3 percent), and at today’s rates if your household income is at least $85,000, you may be able to qualify for a loan that gets you into that $380,000 house. You’ll need to budget about $2400 for PITI (i.e., mortgage payment, interest, taxes, and insurance). So, instead of buying that new car, find a used one and, voila! You can afford little higher monthly house payment.

You’ll also need to budget for things the landlord used to pay for, like painting your home inside and out, putting a new roof on, replacing the water heater, and similar maintenance. Let’s estimate about 1.5 percent of the purchase price for upkeep each year (about $475/month), since that’s usually about what it costs.

Before you panic, let me share a little more good news: you get to write off some of your mortgage payment. Let’s say your household income puts you in the 25 percent tax bracket. Some of your mortgage payment is tax deductible:

Mortgage payment        $2400
Maintenance/upkeep   $   475
Tax benefits                    $ -265
                                          $2610/month

If you think this is a realistic number, here are some important facts about qualifying for a home loan. First, you need to have good credit (a credit score in the mid-to-high 600s). Next, you need reportable income. For the FHA loan I’ve used as an example, there are minimum income restrictions based on formulas that have to do with the number of people in your household, the number of children you have, and other factors. The final requirement is job stability. You need to have been in your job for at least a year, and it needs to appear that you will remain in that job for the foreseeable future.

Owning your own home has many benefits, the most obvious of which is financial. Your monthly mortgage payments allow you to build equity in an investment that is likely to increase in value over time. I can’t make promises, but I can tell you that with all the ups and downs in the economy during the past 50 years, the overall trend in the value of real estate has been up. I bought my first property in 1973 for $18,000. Today, it is conservatively worth $275,000. That’s an average annual increase of 6.4 percent.

Owning your own home also has benefits that go beyond financial. You get to pound a nail and hang your child’s artwork wherever you want without asking anyone for permission. You get to plant trees, paint a room your favorite color, and rip up that ugly carpet. And all your hard work benefits YOU.

If you think you might be able to purchase a home and you’d like to learn more, call your local Realtor and they can help you figure it out.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.

What Can Delay an Escrow?

An escrow process is the process you go through when a property changes owners, so whether you’re a buyer or a seller, you generally don’t want to delay it. These days most escrows take about 45 days; a few can be quicker and some can be much, much longer.

To keep things moving it’s best to communicate even the most seemingly inconsequential details with your Realtor and your escrow officer. Here’s a list of issues, big and small, that can delay or derail your escrow.

If you are using a power of attorney to sell a property, you’ll want to mention this ahead of time because some powers of attorney cannot be used this way.

If the property is owned by a trust, be sure to mention it so the proper papers can be drawn up. This is no big deal, but the paperwork needs to be right.

If you are a real estate investor hoping to accomplish a 1031 Exchange, plan ahead. In a 1031 Exchange, you can use the proceeds from the sale of one real estate investment property to purchase another real estate investment property, and defer paying taxes on capital gains that would be due without the exchange. When you sell an investment property and reinvest the funds, there are restrictions regarding which properties qualify and how quickly you need to complete the second transaction. And you’ll need to choose an accommodator—the person who will hold the proceeds from the sale of your investment property until you identify and close escrow on the replacement property. These are not big hurdles, but they do take time.

Another potential hurdle arises if you’re selling a property for which any of the people listed on the title have died. If this is the case, you’ll need official (certified) copies of their death certificates, and perhaps an affidavit of death of joint tenants or information from the executor of the estate; you may even need a court order. As soon as the courts are involved, major delays may be, too.

Court orders can be required for several situations: if a buyer or seller has ever filed for bankruptcy, if a minor under 18 wants to sell his or her property, if a property owner is declared incompetent and the conservator wants to sell the property, and the list goes on.

Things can get really messy if joint property owners are in the middle of a divorce or if a divorced couple did not separate assets cleanly when they ended their marriage. In the case of a divorce-in-progress, either side can hold real estate hostage to other divorce demands, and that can extend an escrow indefinitely. And a seller cannot sell a property unilaterally if the ex-spouse’s name is still on the title. He or she will have to ask the ex to sign off on the sale, which may require the seller to track down his ex-wife while she is on an extended backpacking trip through wilderness with no cell service. If the ex-wife is on foreign soil, she will have to go to the U.S. Embassy to have her signature notarized, which may not be her top priority. I’m telling you, these things happen.

If the previous loan on the property was a conventional bank loan, everything’s easy. If, on the other hand, the loan was carried by the seller 27 years ago, paid off 12 years ago, and the seller has since passed away without ever sending a reconveyance proving the loan is paid off and the title belongs to you, have fun tracking down the seller’s heirs for that reconveyance.

The moral of the story is this: communicate early and often with your escrow officer, and things should work out fine.

If you have questions about real estate, contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.

 

Thinking of Buying for the First Time? Think Fast.

If you’re interested in owning your own home, it’s time to go for it. Home prices have started increasing faster than inflation, and interest rates are at historic lows—but probably not for long.

Even if you do not have a down payment, you might be able to qualify for a home loan. Both the United States Department of Agriculture (USDA) and Federal Housing Authority (FHA) provide home loans with little or no down payment required.

To figure out whether you qualify for one of these loans, gather all your financial information: proof of income, employment history (length on the job and in the industry), credit information, bank statements to demonstrate any available cash for a down payment, closing costs, reserves, and a potential co-signer or guarantor for a loan. Then make an appointment with a mortgage broker and be completely honest about your financial situation.

Under the right circumstances, you may be able to get a loan with zero out of pocket. This happens when you combine a low-down-payment loan with credits from the seller for non-recurring closing costs—cases where the purchase price is high enough to offer credit back toward the buyer and that money is used as the cash requirement at closing. Mortgage insurance can also help reduce the amount of a down payment by providing security that the monthly mortgage payment will be made.

If you’re serious about buying a home, and your meeting with the mortgage broker indicates you can qualify for a loan, you should immediately get pre-approved. This tells potential sellers that your offer is the one to accept, because you’ve already done the legwork to make sure you’re qualified. Sometimes people confuse having a good credit score with getting pre-approved for a home loan. While a good credit score helps, many other factors are involved in a lender’s decision regarding a loan:

  1. Your total income
  2. Length of time on the job and in the industry
  3. Debt-to-income ratio
  4. A more detailed credit review than just a FICO credit rating.

Once a loan broker reviews all this material, they will consider providing a pre-qualification or pre-approval letter, depending on the source of the information. Your heartfelt promise isn’t as secure as documents proving your credit worthiness.

After you’ve figured out how much house you can afford, you must figure out how much house you want to afford. Do you want to have a little money left over at the end of each month, or are you investing all you can in your new home? Is there growth potential in your job? Does your spouse plan to go to work and increase your household income next year? Or are you a young couple planning to start a family and have one of you quit your job to stay home with the baby? Be honest with yourself about what kind of payment will allow you to live the way you want to.

Remember, owning your own home means a mortgage payment, tax and insurance payments, and maintenance expenses. On the bright side, it also means building equity in your own property instead of paying rent to someone else so they can build equity in theirs.

To find the right house, choose a real estate agent you like and trust, and tell your agent all the pertinent facts: how much you want to spend, what your new home must have and what you’d like it to have. Share your preferences about location, property size, home size, number of bedroom and bathrooms, and any special considerations. This allows your agent to help you find the home you’ve dreamt of as quickly as possible.

If you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.