By Leonard Baron MBA, CPA, San Diego State University Lecturer | July 18, 2011

“Bank owned home sales” seems to be a topic that keeps cropping up all over the news lately. But what does that term actually mean and how does it impact you if you’re interested in buying real estate?

Definition of a Bank Owned Home

A bank owned home sale is very unfortunate for the existing (soon to be “former”) homeowner, and it occurs when the bank has foreclosed upon the property and taken ownership of the home. These situations are commonly called “foreclosures” or “Real Estate Owned” sales (REOs).  The bank owned homes will be processed through the bank’s system, and an agreement will be made to sell it with a local real estate sales professional. That professional will list the home for sale on the local area Multiple Listing Service (MLS), so that any real estate agent may bring an offer on behalf of their client to purchase the property.

Things To Beware of When You Buy Foreclosed Homes

Now the property joins the MLS pool with all the traditional listings that have for sale signs in the front yard. There is nothing wrong with buying a bank owned home. Sure, the home may be in bad shape or damaged by the prior owner, but it could also be in fine shape or only need a little bit of work. So as an individual interested in buying real estate, you should do your due diligence on these, just as you would with any other property, with perhaps just a little extra caution. There’s always the possibility that the financial distress that led to the foreclosure also led to some neglect of the property.

CAUTION:  There Is One Big Difference When Buying a Foreclosed Home

Now, in California and many other states, there is a big difference when you buy foreclosure homes. With a traditional sale, even if they are selling it as-is, they still need to disclose any known defects with the property – like a slab crack or unpermitted additions. Bank owned homes, since the bank has never occupied it, do not come with the disclosure – commonly called at Transfer Disclosure Statement (TDS) – because the bank doesn’t really have knowledge of any issues.

So you are truly taking the house AS IS. And while there may be issues with the property, a little caution up front can help reduce your risk.

Mitigate Your Biggest Risks

First, of course, have a home inspector look at the property and prepare a report on his or her findings. Next, check with the county for any code violations or known defects. And if it is in a Common Interest Development (HOA), you can also check with them for any issues.

And as with any property, once you have it under contract, you should also check the title report for issues, a Natural Hazard Disclosure Report (NHD) for flood plains, earthquake zones, chemical contamination, etc.  You can also check and with the insurance company for past insurance claims. There are several other checks and reports you can get – talk to your real estate professional about these, and work with them to determine what you need.

The biggest risk you face is the condition of the property. So if it needs work, just make sure you get some bids from contractors, don’t take your own guess or a non-professional’s advice on what the repairs will cost. Individuals typically under estimate the costs and time frame associated with renovating property by a lot!  So be meticulous and take the time to really figure out the details up front. Then add a generous contingency, like 50%+ to your estimates. 

That 50% covers all the items you didn’t think about when you were considering the purchase, but now that you own it, you’ve decided you’d like to add all kinds of extra details “now we’re having work done…”

Buying foreclosures can be just a good as traditional home sales, just make sure you understand the true condition of the property, and do the proper due diligence up front. 

Now go help the economy by purchasing your dream bank owned home!

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Author Leonard P. Baron, MBA, CPA, is a real estate lecturer at San Diego State University, a long term residential real estate investor and author of Real Estate Ownership, Investment and Due Diligence 101 - A Smarter Way to Buy Real Estate.
You can learn more about him and get his free – “Real Estate Buying Due Diligence Checklist” at professorbaron.com - under Chapter 1 – Due Diligence (no sign up or registration needed, just download it for free!)

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By Leonard Baron MBA, CPA, San Diego State University Lecturer | June 27, 2011

Real estate has gone through a few tough years, and many who are considering buying vs. renting are asking themselves, “Is now the time to rent or buy a house?”

Realtors and the National Association of Realtors are telling us that today’s buying environment is the best it’s been in years, maybe in a lifetime. Low prices plus cheap financing equal opportunity! As an independent and neutral analyst on the subject, I can tell you that I fully agree that this can a great time to buy property.

Now that doesn’t mean any property, nor is it a great time to buy property for everyone. Add to that to the difficulty of obtaining financing, and you’ve got some significant issues to think through before deciding between renting or buying.

The most important aspects of real estate are being a long-term owner and buying what I call the “right” property for you.  So without further delay, here are the 3 Buying vs Renting Rules of Thumb that will help you put these into action, and, in turn, help increase the chances that your choice between buying and renting will be the right one.

RULE OF THUMB 1:  Avoid Short Term Property Ownership

First and foremost, we buy property with the hope that we will be financially better off down that road than if we remained a renter of someone else’s property. For the vast majority of purchasers, the reality is that if you are not going to own property for at least five years, you will probably be financially better off—and have a much lower level of stress—by paying rent to someone else.

The reason is that there are significant transaction costs on the buy and the sell that will probably wipe out any potential equity you may have hoped to earn on short-term ownership. In addition, you often pay more to own than to rent, so all that additional money could have been saved and invested elsewhere.  Owning real estate is also expensive, stressful, and time consuming, especially if you have to put thousands of dollars into a property you plan to sell in the next few years.

So the number one buying vs. renting tip is – buy property for the long haul. If you’re in the military, a professional athlete, or just don’t know what your future holds: make life simpler and stay a renter.

RULE OF THUMB 2:  It Makes Sense to Take the Time to Buy the RIGHT Property

If you’re committed to buying and holding the property, you must make sure the property you buy is the right one for you, and for all the right reasons.

Reasons such as school district, size, location, and property condition may all come into play. Then don’t forget (or underestimate) the cost to get property into the condition you would like it to be in. Don’t rush to buy a property that you don’t love. Take your time, this is the largest purchase you’ll ever make, and it has significant financial risks.  Take the time to do the hard work up front, the first time around.

How do you do that? Figure out the most important features you want in a home and write them down. Talk to friends and family to prepare that list.  They may come up with some ideas you might not have considered. Realize you will never find the “perfect” property, but by putting some work and thought into it, you will find something that matches your price range and desires, and that you can be proud to call home.

RULE OF THUMB 3:  Be Aware of the Rent vs. Own Differential

Finally, before you purchase, make sure it isn’t too much more expensive to own the property than it would have been to rent it.

Now, fancier properties are usually much more expensive, and if you can afford it, and love it, go for it. But for the rest of us, it makes sense to ensure that our hard earned dollars are well spent. So if you want to buy a fancy condo and you need to put down $50,000 to buy it, and it costs $3,800 per month to own, yet only $2,300 to rent, that’s an extra $18,000 per year for the ownership privilege, plus your down payment. So make sure that makes sense to you.

Only you can make that decision about whether to buy or rent a house. But those items above are the biggest mistakes I’ve seen people make: short term ownership, buying just to buy something, or buying where they can rent at a much lower cost.

So think those through as you consider your buying vs. renting housing options for the next few years, and realize it is a great time to buy real estate – but only for the right purchaser and for the right reasons!

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Author Leonard P. Baron, MBA, CPA, is a real estate lecturer at San Diego State University, a long term residential real estate investor and author of Real Estate Ownership, Investment and Due Diligence 101 - A Smarter Way to Buy Real Estate.

You can learn more about him and get his free – “Real Estate Buying Due Diligence Checklist” at professorbaron.com - under Chapter 1 – Due Diligence (no sign up or registration needed just download it!)

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By Leonard Baron MBA, CPA, San Diego State University Lecturer | June 9, 2011

So you’ve read that interest rates are some of the lowest on record, and you want to figure out if it’s time to refinance. 

And if not now – when to refinance? Now, financing has become significantly harder to do, and more expensive in the past few years, thanks to the financial crisis. But for those with good credit, financing is still possible, and may make financial sense.

In this article, we will run through some of the basic issues you should contemplate to help give you a framework for deciding whether to refinance. 

Regardless, the best person to help you sort through this framework and help you reach a final decision about when to refinance is your mortgage lending professional.

Questions to Ask Before Deciding When to Refinance

Planning on Moving?
The first question to ask is whether you’re going to own the house in question for at least two to four more years—the longer the better.  If you’re not planning on owning for at least this timeframe, refinancing is most likely too expensive and too much work to be a net benefit to you. HOWEVER: The bigger the mortgage, and the bigger the differential between your current mortgage interest rate and the rate you might get by refinancing – the more it might make sense, even on a shorter term basis.

Can you Even Get Refinanced?
It can be tough to get refinanced these days. If your loan-to-home-value ratio is too high, meaning that your property doesn’t appraise at a high enough value in comparison to the amount that is still outstanding on your loan, you may have trouble getting refinanced.  The bank may also consider you to be too high a risk if you’re self-employed or if you have credit issues. But the only way to know for sure is to check with your mortgage lender.

What are the Costs vs. Reduction in Interest Rate?
If you are qualified for financing, your lender will also let you know what interest rate you can secure, and how much it will cost you to refinance. So in order to make sense of it, you would need to do a quick rate vs. loan fees analysis. For example if you refinance a $300,000 loan it might cost $6,500 total once you add up points, escrow, title, appraisal, etc. If your loan is dropping by one-half of a percentage point you will save $1,500 per year – which is about $1,000 after taxes. So you are paying $6,500 to save $1,000 per year, it will take you 6.5 years to earn your money back. That isn’t a very good deal. If the numbers are $6,500 in loan fees to save $3,000 per year in interest, that’s a 2.2 year payback period – and a much better deal!  You can use the “Should I refinance my home mortgage” calculator on our Power Tools and Resources page (under the Home and Mortgage section).

Which Rate/Point Combination to Pick?
Ok, so everything looks good and you decide now is when to refinance.  Great. The lender gives you a few rate/point options. So do you want 5.0% interest rate at one loan origination point? Or 5.25% at one quarter of one loan origination point? If you compare the amount that it costs you, to the amount it saves you each year, you can figure out your payback period just like in the above paragraph, when you figured out if it made sense to refinance. Take one-third off the annual interest savings to account for the tax deduction you get for interest. This is a little complicated, but if you understand the prior paragraph, you should understand this one.  Or, you can just plug the competing scenarios into our “Should I refinance my home mortgage calculator!”

Compare Two Bids.
Lastly, you should use your trusted mortgage lending professional to do the loan.  However, you might also consider getting qualified by at least one other lender, and then compare their costs and rates against each other. That way you can be sure your preferred lender is giving you a fair rate/point combination on your refinance.

Generally speaking, it can be time consuming and challenging to properly dissect the costs vs. benefits of refinancing a property. That’s why it can be helpful to turn to trusted lending professional who you know well and who you trust to give you a fair deal.

The above guidelines should provide a reasonable framework to help you determine when to refinance. Again, the rule of thumb to remember is: the bigger the loan and the bigger the rate drop, the more worthwhile it typically is to refinance.
 
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Author Leonard P. Baron, MBA, CPA, is a real estate lecturer at San Diego State University, a long term residential real estate investor and author of Real Estate Ownership, Investment and Due Diligence 101 - A Smarter Way to Buy Real Estate.

You can learn more about him and get his free – “Real Estate Buying Due Diligence Checklist” at professorbaron.com - under Chapter 1 – Due Diligence (no sign up or registration needed just download it!)

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Guest Post by Leonard Baron MBA, CPA, San Diego State University Lecturer | Tuesday June 1, 2011

Ready for the joys of homeownership?

Not everyone fully understands the steps in buying a house, so I’ve tried to put some of my expertise on paper here for you by providing general guidelines to keep in mind up front, and then clearly outlining the steps in buying a house herein.

Everyone knows that buying a house can be a time consuming, stressful, complex process.  Rest assured, however, that the more you know, the more you can increase your chances to eliminate some of that stress, and make smart decisions.

General Home Buying Guidelines

Guideline 1
Before you move ahead with a home purchase, make sure it really makes sense for you to buy a home at all.  A simple rule of thumb to follow is that if you do not plan to own any given home for at least five years, you will most likely be better off renting someone else’s property.

Guideline 2
Owning shouldn’t be significantly more expensive than renting. Ownership usually is somewhat more expensive but shouldn’t be incredibly more so, so just make sure that whatever you’re buying makes sense for you. Note this rule of thumb, however: The fancier the house, the more owning will cost over renting.

Guideline 3
Don’t buy in an area unless you know it really well!  Remember the #1 rule in real estate: Location, location, location!  Take the time to know the area—you can change the house after you buy it, you typically can’t make the neighbors move away or the crime rate in the neighborhood go down.

Once you’ve determined you really should buy a house, it’s time to get qualified by a reputable loan officer to see what price property is affordable for you.  Then you should interview a few, and select one that’s qualified and professional to represent you throughout the home buying process. 

Once you’ve done that, you are ready do start seriously shopping for a house.

Now the real fun starts! Buying a House: Step By Step

Step 1. Determining Type, Location and Amenities
The trick is to find some areas that match what you can afford with what you desire to own. Think through the amenities you want, like good schools, parks, nearby retail centers, etc.  Then think urban versus suburban, whether you want to be near specific highways or commuter railways, schools, work places and so on.  Also consider whether you’d like to own a single family home versus a condo or apartment or townhome.

Step 2. Shopping for Properties
You should expect to look for a few months as you drive areas, go to open houses, review online listings and have your sales professional give you property tours. Online websites like Zillow, Trulia and Redfin are a huge help, and you should view at least 15 homes in person, to get a feel for what the market has to offer.

Step 3. Property Offers
When you find the “right” property, make an offer quickly. You typically have a study period and little money at risk for 7-17 days as you do more research of the property and area. Depending on the market, it may be just the first of many offers you will make, as you fight other potential home buyers for the better properties.

Step 4. In Escrow
If you strike a deal with the seller, you are in escrow! This is when you work through the terms of your contract, such as doing the home inspection and other due diligence to make sure it is the “right” property for you. Mind all the contract terms and timelines carefully, as you may soon have money at risk.         

Step 5. Mortgage Loan
Once you are in escrow, it’s time to move forward with your mortgage financing immediately, as loans take 30-45 days to complete. Get all the newly required and re-requested documents to the bank quickly. It’s a lot of paperwork, but that is the process.

Note: Do not buy any cars, furniture, run up credit card debts or forget to pay bills on time during this process. It could kill your financing and hence the deal!  See the FinancialRx article on this topic, called Home Buying Mistakes to Avoid: Major Financial Changes, for more information on this potentially costly new home buyer mistake.

Step 6.  Moving Forward
As your lender works through their underwriting process and requirements, you should work through your due diligence of the area, property condition, HOA documents, title report, property insurance, etc. There are plenty of steps in buying a house and you will learn that they can take a lot of time, so keep moving forward!

Step 7.  Closing Escrow and Owning the Property
As the bank does its final loan approval, escrow will prepare documents to transfer title to you. Escrow will prepare a preliminary HUD-1 showing how much money you need to close the purchase. You must get your funds over to the escrow company (typically by writing them a check), you will sign loan and purchase documents, the bank will fund the loan, and record your title to the property at the courthouse. 

Congratulations!  You’ve just joined the world of real estate ownership!

Those are the basic steps in buying a house. It is likely the largest purchase you will ever make, and taking the time to learn some of the basic processes can help to make your ownership experience a good, long-term, wealth-building one.

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For further help, you can download and review a Due Diligence Buying a Home Checklist from Leonard Baron’s website at no charge and with no log in required, under Chapter 1 at professorbaron.com.

Don’t skimp on protecting yourself on your largest purchase. Take the time, energy and effort to consider the real and significant issues with real estate ownership, and significantly lower your risks by making prudent choices that will last for years.

Leonard P. Baron, MBA, CPA, is a real estate lecturer at San Diego State University and author of Real Estate Ownership, Investment and Due Diligence 101 - A Smarter Way to Buy Real Estate.

Leonard is a long term residential real estate owner. He buys investment properties now, he does commercial real estate investment consulting at LPBServicesLLC.com – and he loves kicking the tires on a good piece of dirt!

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Guest Post by Leonard Baron MBA, CPA, San Diego State University Lecturer | Tuesday May 17, 2011

So, you’re ready to enter the real estate market and you want a “Buying a House Checklist” to help you make better purchasing decisions.  Smart.

You know that these are some of the largest decisions you will make in your lifetime, and they will have significant financial impacts on you for years to come. You also know that independent, unbiased information will be the most useful in helping you make smart, and safe purchasing decisions.

Unbiased Home Buying Information Does Exist

This independent information does exist, and the framework for making smart choices has not changed over the years. What has changed is the ability for the average real estate buyer to have the tools needed to do their homework, which is also called doing your “due diligence.”

One of the main decisions you’ll face is whether you should you even buy real estate in the first place, and what issues you should consider in the ultimate decision. Impacting your course of action are several key factors:

• How long you plan to own the property,

• Whether it is the right area and type of property for you;

• And how to determine the financial picture, so you can make sure you can afford the house and still pay all your other bills.

Don’t Buy A House Just to Trade Up In a Year or Two

For example, the old adage of buying a property to earn some equity, and then trade up in a few years really doesn’t apply in the current marketplace.

Experienced buyers know what the novice does not…. that the transaction costs on the buy and the sell wipe out any hope for equity gain if the property is not held for a minimum of five years.

Hence, if a buyer isn’t sure they are going to own the property a long time, they will most likely do better by renting and leaving all the expensive issues of ownership with their landlord. The truth is, renting is not necessarily throwing away money, but short term ownership typically does result in throwing money away!

When Buying a Home, Be Aware of the True Tax Effects

Other issues that a buyer would want to know relate to the true income tax impacts of real estate ownership, and whether or not a buyer will really get any tax benefits. Said another way, it’s important to understand the basics on how taxes work so you can make correct and better decisions. There is a Buying a House Checklist that you can download for free that covers this, and many other critical issues that an informed buyer should understand before they buy.

For example, further items to consider include: 

• HOA financial analysis to lower the risk of higher HOA fees or special assessments,

• Property condition and inspection issues to help you understand the true costs of property rehabilitations and avoid potential money pits

• Title insurance and reviewing a plat or survey so you are sure you are getting what you believe you are getting and issues do not crop up after you close escrow

• Property and liability insurance so that if your house is damaged or you are sued, you have insurance coverage in place

• Many other items and issues that you should consider and think about when purchasing real estate.

Taking the time to use some unbiased information to help you make smarter choices can reduce the risk of something going wrong on your purchase, and hopefully lead to a smart and safe long term real estate experience.

You can download and review the Due Diligence Buying a Home Checklist from Leonard Baron’s website at no charge and with no log in required, under Chapter 1 at professorbaron.com.

Don’t skimp on protecting yourself on your largest purchase. Take the time, energy and effort to consider the real and significant issues with real estate ownership, and significantly lower your risks by making prudent choices that will last for years.

_______________________________________________________________________________________
Leonard P. Baron, MBA, CPA, is a real estate lecturer at San Diego State University and author of Real Estate Ownership, Investment and Due Diligence 101 - A Smarter Way to Buy Real Estate.

Leonard is a long term residential real estate owner. He buys investment properties now, he does commercial real estate investment consulting at LPBServicesLLC.com – and he loves kicking the tires on a good piece of dirt!

You can find more information at ProfessorBaron.com.

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By Wendy Mihm | March 21, 2011

If you’re pondering the purchase of a house, existing or new construction, first home or second, an important question to ask yourself is “Why do I want this house, anyway?”  Because things have changed from even just a few years ago. 

Many people who ask themselves “Should I buy a house now?” are asking this question because they’re considering a home purchase either entirely, or at least in part as an investment.  And buying a home as an investment may no longer make as much sense as it once did.

Let me show you a graph to give you an idea of what I’m talking about.

Now, even if you don’t love graphs, stick with me a minute – this one is pretty interesting. It shows the history of existing (not newly constructed) home values as an investment over the last 116 years.  Values are all adjusted for inflation to today’s dollars. 

To me, the graph tells two relevant stories.

(Fancy graph courtesy of the fancy New York Times)

First, the graph tells us a story about the crazy spike on the end.
If you are like many people (myself included) you have a hard time getting recent memories out of your head.  If you look at the graph above, relatively recent memories would include that gigantic spike on the far right, which starts rising in the latter part of the 1990’s, comes plummeting down in the mid-to-late 2000’s, then crashes during the Great Recession of 2008-2009.

You might know quite a few people who made an absolute killing buying houses in the late 1990s and even the early 2000’s. We know a power couple who bought up whole sections of Pasadena and flipped the houses like it was a game of Monopoly. They, and lots of people like them, raked in a ton of cash and made it look easy during the upward part of that spike. Memories like this are hard to erase, so many of us still think that buying a house should be almost a no-brainer investment. Yes, even after the crash.

Second, the graph tells us a story about many of our parents.
Take a ruler and lay it down around the ‘60’s or ‘70’s (when our parents’ generation was buying their first house) and put another part down where the line hits 2011.  Despite all the crazy ups and downs, you’ll see that the ruler is slanted upward.  What you’re seeing is an upward trend, which means their homes went up in value as an investment, even though they probably never intended to buy their home as an investment at all.  Here’s how their story went.

My parents, and many people their age, simply bought a “starter home,” then when they grew out of it, they bought one that was a bit bigger, but still sensible.  By then, they had been faithfully paying down their mortgage, their first home had risen “predictably” in value, and they had built up a fair amount of equity in their home. This put them in an excellent position to “trade up.” 

And so it went throughout their lifetimes – they continued to slowly and sensibly step up the ladder to bigger and better homes, through a combination of faithfully paying down their mortgages and fairly steady increases in home values.  Oh sure, there were some “boom” and “bust” cycles in the ‘70’s and ‘80’s but those were quite tame compared to what we just went through.  We saw our parents’ generation “ladder up” and as a result, we grew to have similar expectations for our own home ownership experiences.  Then that giant spike happened in the chart up there and everything blew up in our faces.

So now what to do? 

Very simple. 

When you find yourself asking “Should I buy a house now?” go back to the basic question “Why do I want this house?” 

If you want the house as a home – and I mean you’re really going to settle in, put some flowers on the porch and teach some kids how to ride a bike—then you may really be ready to buy a house now.

But if want that house primarily because you think it’s going to be a sure-thing investment and make you a bunch of money in a hurry, you might want to think twice. 

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By Wendy Mihm | February 14, 2011

Whether you’re buying your first house or considering upgrading to a larger home, many people start with the basic question “How much home can I afford?”

Home Affordability Rule of Thumb

There is a rule of thumb that you can apply, and we could theoretically end this post right now.  Here’s how it goes:  most of us can afford a home that costs about three times the amount of their total annual household income.  Here’s what it looks like as a math problem:

(Your annual salary + your spouses annual salary) x 3 = price of home

That assumes two key things:  first, that you and your spouse are able to make a 20% down payment on the house and second, that you are carrying only a moderate amount of other debt, such as student loan or credit card debt.

We will not end this post there, since a rule of thumb is rarely enough for most of us, and because it’s also important to know the upper limit of what you can stretch to.  Why?  Because if you are looking to buy your next home and not your “starter” first home, you may be planning to raise your family and stay in that home for the long haul.  For this reason, you may be looking to stretch a bit.  If all goes as planned, your income(s) may grow as your career(s) do, and house payments that are a stretch now may not seem so difficult 5, 10 or 15 years from now.

Of course, in doing so you don’t want to get yourself into too large a loan and end up not being able to make the monthly payments.  We heard that story too many times during the Great Recession and don’t want to re-learn that lesson.  In finding the right size loan, you will be looking to strike a balance between stretching to find a home that will suit your family for the long haul, and staying within a limit that will remain financially achievable.

So let’s look again with a new lens, and figure out what your responsible upper limit could be. 

Simply put, the upper limit on the amount of home you can afford is:

The dollar amount of your down payment + the largest loan for which you qualify = price of home

You and your spouse are in charge of the first part of the equation in that you determine the size of your down payment.  If you are buying your first home, you will need to save money for quite awhile, as the magic number to reach is 20% of the price of the home.  And when homes are as expensive as they currently are in many areas, 20% of a home price can be a big number. 

20% Down Payment is Key

But having a 20% down payment will give you the most power as a buyer.  First, it will help you to qualify for a loan, and that loan will likely be at a better interest rate.  Second, it will keep you from paying private mortgage insurance (PMI), which is just money paid to the bank to compensate them for the possible risk of default on the loan.  If you have to pay PMI, it gets tacked onto your monthly mortgage payments, so if you can avoid that extra expense, it’s a great savings.

The lender, often a bank or other financial institution, will decide the second part of the equation, the size of the loan.  In doing so, they evaluate your household’s income sources, debt, credit score and down payment to decide how risky it will be to loan you money.  Then they decide on a loan amount and an interest rate and voila!  That is the dollar amount that you enter into the second part of the equation.

If you have purchased a home before, you are familiar with this exercise, but if it is your first home, you may also be familiar with this type of scrutiny from past landlords.

Regardless, it is good to know before you start seriously shopping for a house, how much home you can really afford.  That way you can get pre qualified for a loan and, when you find the right home, you’ll be ready to put in a bid.

Below is a calculator to get you started.  The thinking is a bit different from what we discussed above, but it lets you play around with house prices, so it’s pretty fun that way.  Here’s how it works:

Step 1
Plug in the price of a house you found (or any price you think would be a good stretch price for you).

Step 2
Plug in information about a loan you could reasonably expect to get.  Just take your best guess about interest rates and loan lengths.  Common fixed rate lengths are 15, 20 and 30 years.  A quick Google search for interest rates will get you a zillion results.  It then asks for your “front and back ratios.”  The calculator has already entered mid-level values for these ratios, so to keep things simple, you can leave these values as-is. But in case you want to know, front and back ratios are just percentages that are supposed to help you limit your housing and necessary living spending.  A front ratio is a percentage of your gross income that you will allow yourself to spend on all housing related expenses, including property taxes and insurance. A Back ratio is a percentage of your gross income that you will allow yourself to spend on your housing expenses plus cost of shelter: food, clothes, gas, etc.  Front / back ratios with values of 28-33 / 36-42 considered conservative.  Values bigger than 35 / 45 are considered aggressive and are not recommended for use.

Step 3
Plug in information about the annual property taxes where you plan to buy the house (you should be able to Google that too), insurance on the house, and PMI (remember, if you’re putting down 20% you can enter 0 for this). 

Play around a bit—have some fun with it!  I find that daydreaming about our next home can be a lot of fun, and it’s even more fun when you can realistically answer the question “How much home can I afford?

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By Wendy Mihm | Wednesday November 17, 2010

Right before you buy your first home, or any home, many of us get really excited and we want to buy things that make the new house a home.  But this is how many people fall into one of the most common home buying mistakes of all:  making a significant financial change right before closing.

How You Get Approved for a Home Loan

When you are approved for a home loan, you are approved based on a very thorough review of your financial situation exactly as it is at that very moment in time.  That means the team who decided whether you were financially fit enough to pay off the loan looked at the income from your job, evaluated your credit score, and everything you owed on your current credit cards and other outstanding debts.

If you go out and do anything to change that picture, like making a significant purchase on a credit card, applying for an auto loan, or changing jobs, you can be immediately and unceremoniously disqualified for your home loan.  And this can happen even if you are just a day away from closing escrow.

What this means in practical terms is that you should wait until after closing to do any of the following:

• Change jobs

• Buy a car, boat or other vehicle

• Buy a major appliance

• Buy a lawnmower or other garden equipment

• Buy expensive electronics or furniture

I know it’s hard, but you’ll have to wait until after you’ve closed to furnish that great new place.  But hey, at least this way you’ll actually have a new place to furnish!

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By Wendy Mihm | December 28, 2010

Buying a Home 101

A Guide for First-Time Home Buyers (or a refresher course for everyone else)

If you are considering buying a home for the first time, congratulations!  It’s a big step and a milestone that has been a pivotal part of the American Dream for generations.  But buying a home is also a serious financial transaction that can potentially affect you and your family for many years to come and should therefore not be taken lightly.

When my husband and I bought our home back in 2005, we did some things right and some things wrong, not the least of which was, well, buying a home in 2005.  In this guide, I’ll pass on what we’ve learned since then, as well as some basic, time-tested home-buying wisdom so you can execute a savvy transaction and move on to the fun stuff.  Like planting petunias in the flower boxes.

1.  Figure out how much house you can afford.

Unless you spent 2008 and 2009 with your head stuck in a bowl of Jell-o, you are aware that, at a very basic level, the catalyst of the Great Recession was the fact that banks were handing out gigantic mortgages at low rates to any shmoe who happened to walk by.  We even heard one story of a guy who submitted a picture of himself in a mariachi outfit as proof of employment for his mortgage application—he was approved. 

The point is, banks were handing out huge mortgages to people who were not qualified, and in turn, people were fooling themselves into believing they could afford more expensive homes than they really could.  Then everything caved in on itself and lots of people lost their homes.

The message here is:  exercise common sense.  Do not buy more house than you can afford.  A good general rule is that your mortgage should not be much more than about 28% of your monthly gross income.  This is the number at the top of your paycheck each month – before the taxes and all the other expenses get taken out.

2. Consider getting “prequalified.”

It often makes sense to get “prequalified” by a lender (a bank) once you get serious about shopping for a home.  Being prequalified to receive a loan for a certain amount of money from a specific bank makes you a more attractive buyer and will speed up your buying transaction.  But remember, just because you are prequalified for a certain amount, does not mean you must spend that amount!  You are free to submit a bid for a lower amount if you think you can get the home for the lower price.

3.  Don’t forget the down payment.

You will probably also need money for a down payment.  Some loans through the Veteran’s Administration offer 0% down, but it is much more typical to need anywhere from 10% to 20% of the purchase price of the home saved up in order to buy the home.  The larger the down payment, the more attractive buyer you are and the less you generally will have to pay in mortgage insurance.  Mortgage insurance?  Yup.  More on that next.

4.  Be aware of the other cash costs of buying a home.

You’ll need more cash on hand than just the down payment when buying a home, but it’s up to you to avoid being fooled into paying more than you need to.  I was fortunate:  I used to date someone who was in the mortgage industry and he tipped me off to look out for bogus charges and boy was he right!  First let’s list the legitimate charges that you could expect to pay for:

• Home inspection

• Termite inspection (varies by state)

• Loan origination fees

• Points (prepaid interest)

• Appraisal fees

• Title search and insurance fees

• Application fees

• Adjustments for utilities or property taxes already paid by sellers

• Recording fees

• Transfer taxes

These could add up to anywhere from 3% to 8% of the purchase price of the home.  You should feel free to look carefully at each one of these fees and ask about any of them that strike you as arbitrary or inaccurate.  Perhaps the application or recording fee can be waived – you won’t know if you don’t ask.  As for bogus fees, our husband and I got a couple of ridiculous fees eliminated, such as an “email fee” (isn’t email free?) and a copy fee (isn’t their job to make copies?).  We also got them to waive the application fee—all we had to do was ask.

5.  Get to know the neighborhood – at all hours

You are going to be spending a lot of time in your house.  You might as well lose a little sleep for one night so you don’t lose a whole lot of sleep for the next 12+ years.  I’ve always thought it was strange that we can do all sorts of online research for much smaller purchases like cameras and shoes and backpacks, but when it comes to buying a home, all that many of us ever do is visit the house once or twice at an open house, and then make a decision on the spot!  Why not camp out in your car in front of the house at 11:15pm on a Saturday night to see if it’s quiet then?  Do you have a baby that will need to take a nap at 9:30am?  Better swing by the house and see what it’s like at that hour.  Is there a barking dog (or three) next door that the realtor conveniently had removed for the open house?  Are there loud neighbors that hang out in front of the house and play music at odd hours?  Better to learn about them before you buy the house, not after.

Talk to the neighbors.  What do they like about the neighborhood?  Do they have any complaints?  Are they all saying the same things?  If so, listen to them – you may end up thinking the same thing after you move in.  Can you walk to anything?  Safeway?  Starbucks?  The park?  Is it near the fire station – meaning, are you going to hear sirens all day and night?  What are the schools like?  Even if you don’t have kids now, you might have them sooner than you think (we did), and the quality of the school systems matters immensely – for their education and for your property value.

Walk around the block.  What does it sound like?  What does it feel like?  Do you feel safe?  If you have kids or plan to have them soon, would you feel safe with them toddling down the sidewalk?  When we bought our home, we felt fine ourselves, but I did not project well enough into the future.  Now we have two kids and I don’t feel that the street is safe enough for them.  Don’t make that mistake, because it can be an expensive and difficult one to fix later.

6.  Mind the #1 real estate rule:  location, location, location.

We broke this rule because we had virtually no choice.  2005 was a home-buying frenzy and the home we bought was the 7th one we had bid on.  And we only got it because the leading bidder fell through.  Five years later, we still love our house, but I don’t love our neighborhood and so we’re contemplating a move because of it.  This is a very disruptive situation that I wish we weren’t in.  You can avoid it by heeding the #1 rule in residential real estate: choosing your home based on location, location, location.

By this, I mean, pick a house in a neighborhood you love.  You can make changes to the house, but you can’t make changes to the neighborhood.  You can’t make noisy neighbors move away and you can’t make an unsafe atmosphere safe.  If you are constrained by budget (and if you are not, you are not reading this article and are also not living here on planet earth), consider buying the most modest house in the best neighborhood you can afford.  Get the number of bedrooms and bathrooms you absolutely need (not want, need) but don’t worry about the guest-room-in-law suite, the walk-out basement, the Viking range, the double oven, and the twin whirlpool tubs just yet if you can’t afford them.  As your finances grow over time, you can add whatever you want.  Really.

7. Don’t underestimate post-purchase expenses.

You will have to pay property taxes each year on your home.  These are no fun at all, they vary by state and are calculated by multiplying the property tax rate in your state by the value of your home.  You will typically be billed for these taxes twice a year, but it makes sense to set the money aside each month so it will be there when you need it.

You may have to pay for private mortgage insurance (PMI,) which is insurance that protects the bank that makes your mortgage loan against the possibility that you will not make your payments.  The key things to understand about this insurance are that you make the payments to protect the bank.  How’s that for a double whammy?  The only thing you get out of it is that mortgage insurance may allow you to purchase a home without putting down 20% of the price of the home.  How much does PMI cost?  Typically about 0.5% or 1% of the value of the total loan will be your premium each month.  For example, if you took out a mortgage for $350,000, your PMI monthly premium would be about $146 ($1750 per year) if it were on the lowest end of that range.  As you pay down your mortgage and/or as the value of your home rises, you may be able to stop paying PMI.

As a renter, you were used to paying utilities such as phone and electricity, but now you’ll pay for water, gas and even trash removal.  Also, if you are in a planned community or a condo, you may also owe homeowners association fees or condo fees as well.

And remember, now that you’re a homeowner, you can’t call the landlord to fix the leaky faucet – you are the landlord, so start emailing your friends to find out if they know of a good plumber in the area.  And while you’re at it, see if they have a good electrician, a good AC guy, a good chimney sweep, a good floor refinisher – you get the idea.

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