CHAPTER 5 Acquiring Housing

Objectives Assess the advantages and disadvantages of renting and buying housing. Contrast the impact of needs and wants on housing costs. Identify items to check before signing a lease. continued

Objectives Define legal and financial terms related to acquiring housing. Summarize the home-buying process.

Acquiring a Place to Live The process of acquiring a place to live begins with many decisions, and include deciding to rent or buy Some ways to pay for housing costs include paying the full amount now paying part now, a down payment, and pay the rest in regular installments

Needs, Wants, and Housing Costs In making housing decisions, know the difference between needs and wants Needs are basic necessities Wants are things a person or family desires and may not need

Discuss Consider housing needs and wants (dreams) ©Pavel L Photo and Video/Shutterstock.com Why do dreams need to match the checkbook?

Costs Involved in Payment Methods Interest is the amount of money paid for the use of someone else’s money Interest is an important financial term to understand continued

Costs Involved in Payment Methods Installment buying is the process of paying for housing in a series of payments over a given length of time With installment buying, you pay a certain amount for the use of the money, or a finance charge The finance charge is stated as an annual percentage rate (APR) of the amount borrowed

A Place to Rent About one-third of all Americans rent their housing, paying a set amount each month A security deposit is required along with the first month’s rent This deposit ensures the owner against any financial loss caused by the renter ©Mare Salerno/Shutterstock.com continued

A Place to Rent Ask these questions What is the rent per month? When is the rent due? Is a security deposit required? Will it be returned if there is no damage? What are the expenses beyond the rent (utilities, storage space, parking, air conditioning, TV/Internet connections, and related expenses)?

The Written Lease Be sure to examine and understand a lease before signing it and getting the keys to the apartment ©Kzenon/Shutterstock.com continued

The Written Lease The lease includes utilities location rental amount security deposit lease period appliances, furnishings, services, and amenities utilities upkeep, maintenance, and repairs legal issues conditions of use special clauses signatures continued

The Written Lease All leases are different Be sure to understand all the points in the lease before signing, especially restrictions

Assigning or Subletting a Lease If a renter decides to move out early on a signed lease, they have three options including continue payments until the lease is over assign the lease sublet the lease Talk with the landlord about these options before moving out early

Responsibilities and Rights of Renting Both the renter and the landlord have responsibilities and rights Two legal consequences of a lease violation include breach of contract eviction ©olivier/Shutterstock.com

Breach of Contract A breach of contract occurs when either the landlord or renter fails to fulfill the promises of the lease, such as breach of contract by the renter in failure to pay rent breach of contract by the landlord in failure to provide water or means of heating the dwelling

Eviction If a renter fails to meet the responsibilities of the lease, the landlord may evict the renter Eviction is a legal procedure requiring the renter to leave the dwelling before the lease is up

Renter’s Insurance Rental insurance protects a renter against loss of possessions due to theft fire natural disaster ©magicoven/Shutterstock.com continued

A Place to Buy About two-thirds of all people in the U.S. own their own houses continued ©Andy Dean Photography/Shutterstock.com

A Place to Buy There are many advantages of owning a home, including a/an increase in value over time depending on economic conditions federal tax deduction on mortgage interest paid The principal is the total amount owed on the mortgage continued

A Place to Buy A disadvantage of owning a home is the potential of a foreclosure Foreclosure is a legal procedure in which a lending firm takes possession of the property This may happen if the borrower fails to pay monthly house payments on time

Examine Your Finances To avoid foreclosure, people can buy houses they can afford ©Andy Dean Photography/Shutterstock.com

Estimating What You Can Afford A simple way to determine how much a borrower can afford to pay for housing is to multiply the gross income 2½ times For example, suppose a borrower’s gross income is $60,000, he or she could multiply 2½ × $60,000 = $150,000 (the amount a borrower could afford to pay for a home) housing-to-income ratio in which monthly housing costs should not exceed 28% of gross monthly income

Estimating How Much Money You Can Borrow Credit history is a record of past payments and a profile of outstanding debts Part of a person’s credit history is the credit score, which is a mathematical calculation that evaluates information in a person’s credit history continued

Estimating How Much Money You Can Borrow Consumer-reporting companies keep and monitor a person’s credit history The FTC requires each of the consumer-reporting companies to provide a free copy of a person’s credit report once every 12 months Lenders use a person’s credit history to help determine whether an individual will pay back the loan

Buying a Pre-Owned Home Advantages of buying a pre-owned home may include the previous owner leaving some decorations (window treatment) providing mature plants in landscaping A disadvantage is that older homes have shortcomings

Discuss Landscaping adds to the curb appeal of a house ©R. Gino Santa Maria/Shutterstock.com ©Paul Brennan/Shutterstock.com What do you observe about the landscaping of the new home (on left) and a pre-owned home?

The Home-Buying Process Steps in the home-buying process include mortgage selection and preapproval searching for a house making an offer finalizing the financing obtaining home owner’s insurance obtaining a home inspection having a survey, appraisal and title search closing the sale of a home

Mortgage Selection and Preapproval A mortgage is a pledge of property that a borrower gives to a lender as security for a loan to buy property The borrower agrees to gradually amortize, or pay back the loan over time ©Stuart Miles/Shutterstock.com

Types of Mortgages Three types of mortgages for purchasing a home include conventional mortgages adjustable-rate mortgages (ARM) require careful consideration because the interest rate could go up dramatically government-backed loans

Conventional Mortgages are long-term, fixed-rate loans (15, 20, 30, and sometimes 40 year loans) require a 5-20% down payment may require private mortgage insurance (PMI) if the buyer does not have the 20% down payment

Government-Backed Loans FHA-insured mortgages which are insured by the Federal Housing Authority against default These mortgages may require a smaller down payment than a conventional loan RD-rural development which is for towns with population under 10,000, 0 down, must be in fair condition VA-guaranteed mortgages which the Veteran’s Administration provides to persons who served in the military No down payment is required by the VA

Shopping for a Mortgage Lender Before deciding on a mortgage, check out various lending agencies Compare at least three lenders for down payment and PMI requirements fixed or adjustable interest rates and APR Closing costs

Obtaining Preapproval for a Loan A preapproval for a loan is desirable for negotiating the purchase of the house During the preapproval process, the lender verifies employment , tax records, bank references, and the borrowers credit history The lender gives the buyer a preapproval letter indicating commitment

Using a Real Estate Firm Real estate firms advertise homes for sale through a multiple listing service A realtor is a member of the National Association of Realtors Realtors charge a fee, or commission, usually 6 percent of the selling price of the home Sellers usually pay this fee continued

Using a Real Estate Firm The realtor represents the buyer, and is also known as the “buyer’s agent” Some realtors are “seller’s agents” Realtors can help make the home-buying process efficient and accurate ©Andy Dean Photography/Shutterstock.com

Locating Homes for Sale Options for locating homes on your own include Internet shopping—a virtual walk-through is available on some sites newspapers word of mouth neighborhood “For Sale” signs Locating a home on your own requires a great deal of knowledge

Making an Offer—The Sales Contract After finding a likable, affordable house, make an offer to purchase it Earnest money is a deposit that goes along with the offer to show the seller the buyer is serious about buying the house The agreement of sale, another name for the offer to purchase, is the official document filed to purchase

Finalizing the Financing When the agreement of sale is final, finalizing the loan arrangement with a lender is next The lender locks-in the interest rate and provides a written guarantee The documents a lender requires to make the final loan decision include a copy of the signed sales agreement and completed loan application continued

Finalizing the Financing Other documents the lender may require include tax information for the previous 2 years two or more paycheck stubs debt information (credit report) proof of other assets address and description of property

Obtaining Home Owner’s Insurance Home owner’s insurance protects the home owner against potential hazards

Obtaining a Home Inspection A home inspection is an evaluation of the construction and present condition of the home and reveals defects that impact home value and sales price Some states also require termite and mold inspections The buyer arranges and pays for the home inspection continued

Obtaining a Home Inspection A home inspector works for the buyer and may find problems that the buyer may not see Existing problems can be dealt with upfront with the seller ©olivier/Shutterstock.com

Having a Survey, Appraisal, and Title Search Many mortgage lenders require a professional survey of the property to assure that the property lines are correct and that no problems exist An appraisal is an expert estimate of the quality and value of the property

Title and Deed An abstract of title is completed by an attorney, to assure correct ownership no debts, or liens, on the property A title is a document that gives proof of property ownership upon closing the sale A deed is a document that shows the transfer of the title from one person to another

Closing the Sale of a Home A closing is held at the end of the sale Closing costs are due at the closing and may include recording fees attorney’s fee abstract of title and title insurance appraisal fee survey charge other fees (origination, escrow, and points)