Chapter 28:

Deciding to Buy a Home

Deciding to Buy a House

Advantages:

Build equity: difference between fair market value and the debt in the property (how much you owe compared to how much it is worth)

Deduct real estate taxes and mortgage interest paid on federal income taxes

Disadvantages:

Cost of upkeep

Inconvenience of upkeep

Inability to move quickly

and easily

Deciding to Buy a House

Can you afford it?

Mortgage: written instrument by which the borrower pledges real property as security for the loan

Can be prequalified: how much you can afford and what down payment is needed based on your income

Deciding to Buy a House

Recommendations:

Mortgage payment should not

exceed 28% of monthly take-

home pay

Included: principal amount of

loan, interest, and taxes

Total monthly debt should not

exceed 36% of income

Limit monthly housing

expenses

Factors Considered:

Monthly income and expenses

Credit history

Employment history

Source of down payment

(savings account, family, etc.)

Value of property

Loan-to-Value Ratio:

Mortgage/Market Value

Bigger down payment, lower

ratio

Finding the Right House

Finding the Right House

Things to consider as a home-buyer:

Taxes

Location

Size

Transportation

Schools/hospitals/rec centers (YMCA)

Churches

Zoning restrictions

Price in neighborhood

Purchase and Sale Agreement

Written stmt of the rights

and duties of both parties

Example items:

Clear title

Refunds given if needed

Payment of utilities

Certificate that house is free

of termites

Use a lawyer if possible; if

not, read carefully and make

adjustments as needed

Applying for a Mortgage

Locations:

Banks

Credit Union

Mortgage Companies

Insurance Companies

Pay off mortgage, you own property outright

Cannot pay off mortgage, foreclosure happens

In a foreclosure, lender sells property to receive payment for loan

Mortgage Costs

Typical Costs:

Application Fee

Appraisal Fee

Credit Report Fee

Inspection Fee

Origination Fee

Point: one-time charge

equal to 1% borrowed

Other costs:

Document Preparation

Attorney’s Fees

Title Insurance

Surveyor Fees

Termite Inspection

Mortgage Insurance

Homeowner’s Insurance

Mortgage Costs

RESPA: Real Estate Settlement Procedures Act protects buyers

Provide booklets explaining real estate settlement procedure

Give estimate of costs incurred

Later, give exact details of cost

Provide a truth-in-lending statement showing true costs of interest and finance charge on loan

Types of Mortgages

Traditional

Loan made between borrower and private lender at market interest rate

Need a large down payment

Fixed-Rate

Large down payment

Interest rate never changes throughout life of loan

Graduated-Payment

Fixed interest rate through life of loan

Payments grow over life of loan

Balloon-Payment

Low fixed payment through life of loan

One large final (balloon) payment

Types of Mortgages

Veteran’s Administration:

Guarantees loans made to

eligible veterans

Offer:

Lower interest rates

Reduced costs

Little/no down payment

VA guarantees repayment of

60% of outstanding loan

VA will provide their own

loans in lower economic areas

Type of Mortgages

HUD/FHA:

Federal Housing

Administration

U.S. Dept. of Housing and

Urban Development

Qualified home buyers make

small down payments

Get loan that is guaranteed by

org.

Protects lenders from default

borrowers

Taking Title

Co-ownership:

Tenancy in common:

Two or more people have undivided interest in property

If one dies, their heirs inherit their portion of the property

Joint tenancy:

Two or more people have undivided interest in property

If one dies, their interest automatically goes to the surviving tenants

Tenancy by the entirety (based on Common Law doctrine):

Special tenancy for lawfully married husband and wife

Both have equal, undivided interest on whole property

Property cannot be taken unless both spouses are being sued together

Taking Title

Deed: Formal written

instrument that transfers

ownership of real property

Grantor: gives deed

Grantee: receives deed

Recorded in public records

office

General Warranty Deed:

Says title to property is good

If title turns out to be faulty,

seller will take care of any

loss suffered by buyer

Special Warranty Deed:

No defect in title while

current owner had it

Does not guarantee anything

from previous owners

AKA Limited Warranty Deed

Taking Title

Bargain and Sale Deed:

Transfers title without

warranties

Similar to other deed, but with

no warranties

Quitclaim Deed:

Release’s the grantor’s right

to the property

Passing of Title:

Title passes on closing date

Typically, buyer/seller meet

face-to-face this day to sign

papers and pass keys over

Escrow: depositing money,

legal documents, and

instruction with a third party

to be held until the conditions

of the contract are fulfilled;

agent checks title examined,

prepares documentation,

closes transaction

Limitations on Property Use

Rights of a property

owner:

Use the property during

your lifetime

Exclude others from

using it

Leave property to your

heirs when you die

Sell property to someone

else during your lifetime

Police Power:

Right of government to

regulate the use of real

property for the public

welfare, morals, and

health

Overall: protection of the

people

Limitation on Property Use

Nuisance and Zoning:

Nuisance: interferes with the

enjoyment of life and/or

property

Examples:

Smoke/dust

Bright lights

Odors/fumes

Zoning Laws: how property

may be used in a specific area

Examples:

One-family living

Multiple-family living

Limitations on Property Use

Health and Public Safety:

Fire-prevention laws

Required inspections

Certificates of occupancy

Soundness of construction

Eminent Domain:

Right of government to take

private property for public use

with or without consent of

owner

Examples:

Parks

Roads

Schools

Owner is compensated, but if

an amount cannot be agreed

upon, courts decide

appropriate amount

Limitations on Property Use

Air Rights:

Past: owners had right to

property from surface to

sky and down to center

of earth

Changed with creation of

aviation

Now: only have right to

what you actually use

(have reasonable control)

Air rights CAN be sold

Adverse Possession:

Someone who does not

own property takes

possession for a length

of time stated by area

Uninterrupted time with

continuous owners count

Possession must not be

secretive

Example: wrong

property line

Limitations on Property Use

Subterranean Rights:

Ownership of property

below the land surface

Examples:

Mines

Wells

Riparian Rights:

Rights of persons to use

water from a waterway

that runs through their

property

Uses/restrictions:

Fishing/boating/swimming

Pollution/change direction

Water freezes: ice is

considered to be part of

the land

Limitations Arising Out of Contract

Deed Restrictions:

Set to control future property use

Examples:

Require house/land price not fall below specific price

Require houses to be a specific distance from street

Restrict land use for a specific period of time

Limitations Arising Out of Contract

Easement: Make some use of land belonging

to another

Cannot be terminated w/o consent of owner with right

Examples: Driveways

Drainage

License: Right to do something on

another’s land that may be considered trespassing normally

Examples: Hunting

Fishing

Advertising

Special Types of Home Ownership

Mobile Homes:

AKA: Manufactured homes

Less expensive

Upkeep is less

Unless on permanent foundation, are considered personal property: no real estate taxes

Ownership and parks are regulated by the state

Special Types of Home Ownership

Cooperatives:

Buyers purchase shares in the corporation that owns/holds mortgage of the apartment building

Shares depend on size and cost of the unit

Have usual rights of ownership for your unit

ADV: deductions from taxes

DIS: if one defaults, other tenants may have to make up the difference or deal with foreclosure

DIS: if co-op is sold, new board of directors must approve you

Special Types of Home Ownership

Condominiums:

Each owner has absolute,

individual interest in your

property

Undivided interest in common

areas:

Parking

Pools

Elevators

Must comply with condo

association

ADV: default by one owner

does not affect another

End of Chapter Questions:

What is a mortgage?

What are the different types of ownership?

How can property use be limited?

Give examples of different types of deeds.

What is a point?

Why was RESPA created?

What is equity?

What is foreclosure?