1. CHAPTER 15 HOME PURCHASE DECISIONS This chapter explores a variety of issues surrounding the decision to buy a house. In particular, we examine the rent or buy decision, how much house you can afford, choosing the right property and the negotiation, purchasing and closing process.

3. Taxpayer Relief Act of 1997 - “Good News for Home Owners”

4. Rent or Buy Decisions Tax consequences of rent versus mortgage payments Mobility Housing prices Examples (Table 16.1 & 16.2) Alternative investments Inflation and home prices Impact of mortgage interest rates Period of ownership (Table 16.3)

5. Income Ratios: The most important test of whether an applicant can afford a particular mortgage loan is by computing the various income ratios.

6. Borrower Income: Income Sources include these: Regular wages Part-time employment Working spouse Rentals Alimony or child support Commissions Public Assistance The underwriter must judge that the income is likely to continue. The income must be verifiable. Self-employment Bonuses Dividends or interest Retirement annuity Social security

7. Estimating Housing Expense: Principal and interest on the mortgage being applied for. Mortgage insurance (if any). Property Taxes Hazard Insurance Condominium or cooperative homeowners association dues (if applicable)

8. Other Obligations: Borrowers will have other obligations, examples include: auto loans, credit card accounts, other mortgage debts, or alimony and child support payments.

9. Housing Expense Ratio Housing Expenses Borrower’s Income < 28% (CONVENTIONAL LOAN) Total Obligations Ratio Total Obligations Borrower’s Income < 36% (CONVENTIONAL LOAN)

10. Higher Ratios may be justified by mitigating factors, such as: Demonstrated ability of an applicant to allocate a higher percent of gross income to housing expenses Larger down payment than normal Demonstrated ability of an applicant to accumulate savings and maintain a good credit rating A large net worth Potential for increased earnings because of education or profession

11. FHA Ratios are: 29 percent for the mortgage payment ratio 41 percent for the total debt ratio VA Ratios are: The VA uses a modified residual method in qualifying a veteran for a mortgage loan, and this result is then double-checked against a total debt-to-income ratio of 41 percent.

12. Neighborhood Analysis “You are buying the neighborhood”

13. Choosing an Area Property taxes and quality of public services Recreational facilities Quality of school system Crime statistics Overall quality of the community

14. Evaluating the Individual Home Attic Wall, ceilings, and floors Roof Basement or crawl space Electrical system Mechanical systems Heating and cooling systems Water supply and waste disposal

15. Making and Closing the Deal Real estate agents Negotiating the price Dealing with the lender Closing attorneys and escrow agents