Shannon’s Resources For Buyers
Benefits of Owning Your Own Home
The Best Investment
As a fairly general rule, homes appreciate about five percent a year. Some years will be more, some less. The figure will vary from neighborhood to neighborhood, and region to region.
Five percent may not seem like that much at first. Stocks (at times) appreciate much more, and you could earn over six percent with the safest investment of all, treasury bonds.
But take a second look…
Presumably, if you bought a $200,000 house, you did not pay cash for the home. You got a mortgage, too. Suppose you put as much as twenty percent down – that would be an investment of $40,000.
At an appreciation rate of 5% annually, a $200,000 home would increase in value $10,000 during the first year. That means you earned $10,000 with an investment of $40,000. Your annual “return on investment” would be a whopping twenty-five percent.
Of course, you are making mortgage payments and paying property taxes, along with a couple of other costs. However, since the interest on your mortgage and your property taxes are both tax deductible, the government is essentially subsidizing your home purchase.
Your rate of return when buying a home is higher than most any other investment you could make.
If you are moving to a home for the first time, you are going to be very pleased with all the new space you have available. You may have to even buy more “stuff.”
Income Tax Savings
Because of income tax deductions, the government is basically subsidizing your purchase of a home. All of the interest and property taxes you pay in a given year can be deducted from your gross income to reduce your taxable income.
For example, assume your initial loan balance is $150,000 with an interest rate of eight percent. During the first year you would pay $9969.27 in interest. If your first payment is January 1st, your taxable income would be almost $10,000 less – due to the IRS interest rate deduction.
Property taxes are deductible, too. Whatever property taxes you pay in a given year may also be deducted from your gross income, lowering your tax obligation.
Stable Monthly Housing Costs
When you rent a place to live, you can certainly expect your rent to increase each year – or even more often. If you get a fixed rate mortgage when you buy a home, you have the same monthly payment amount for thirty years. Even if you get an adjustable rate mortgage, your payment will stay within a certain range for the entire life of the mortgage – and interest rates aren’t as volatile now as they were in the late seventies and early eighties.
Imagine how much rent might be ten, fifteen, or even thirty years from now? Which makes more sense?
Forced Savings
Some people are just lousy at saving money, and a house is an automatic savings account. You accumulate savings in two ways. Every month, a portion of your payment goes toward the principal. Admittedly, in the early years of the mortgage, this is not much. Over time, however, it accelerates.
Second, your home appreciates. Average appreciation on a home is approximately five percent, though it will vary from year to year, and in some years may even depreciate.. Over time, history has shown that owning a home is one of the very best financial investments.
Other Things to Avoid Before Purchasing a Home
Don’t Move Money Around
When a lender reviews your loan package for approval, one of the things they are concerned about is the source of funds for your down payment and closing costs. Most likely, you will be asked to provide statements for the last two or three months on any of your liquid assets. This includes checking accounts, savings accounts, money market funds, certificates of deposit, stock statements, mutual funds, and even your company 401K and retirement accounts.
If you have been moving money between accounts during that time, there may be large deposits and withdrawals in some of them.
The mortgage underwriter (the person who actually approves your loan) will probably require a complete paper trail of all the withdrawals and deposits. You may be required to produce cancelled checks, deposit receipts, and other seemingly inconsequential data, which could get quite tedious.
Perhaps you become exasperated at your lender, but they are only doing their job correctly. To ensure quality control and eliminate potential fraud, it is a requirement on most loans to completely document the source of all funds. Moving your money around, even if you are consolidating your funds to make it “easier,” could make it more difficult for the lender to properly document.
So leave your money where it is until you talk to a loan officer.
Oh…don’t change banks, either.
The Effect of Changing Jobs
For most people, changing employers will not really affect your ability to qualify for a mortgage loan, especially if you are going to be earning more money. For some homebuyers, however, the effects of changing jobs can be disastrous to your loan application.
How Changing Jobs Affects Buying a Home
Salaried Employees
If you are a salaried employee who does not earn additional income from commissions, bonuses, or over-time, switching employers should not create a problem. Just make sure to remain in the same line of work. Hopefully, you will be earning a higher salary, which will help you better qualify for a mortgage.
Hourly Employees
If your income is based on hourly wages and you work a straight forty hours a week without over-time, changing jobs should not create any problems.
Commissioned Employees
If a substantial portion of your income is derived from commissions, you should not change jobs before buying a home. This has to do with how mortgage lenders calculate your income. They average your commissions over the last two years.
Changing employers creates an uncertainty about your future earnings from commissions. There is no track record from which to produce an average. Even if you are selling the same type of product with essentially the same commission structure, the underwriter cannot be certain that past earnings will accurately reflect future earnings.
Changing jobs would negatively impact your ability to buy a home.
Bonuses
If a substantial portion of your income on the new job will come from bonuses, you may want to consider delaying an employment change. Mortgage lenders will rarely consider future bonuses as income unless you have been on the same job for two years and have a track record of receiving those bonuses. Then they will average your bonuses over the last two years in calculating your income.
Changing employers means that you do not have the two-year track record necessary to count bonuses as income.
Part-Time Employees
If you earn an hourly income but rarely work forty hours a week, you should not change jobs. There would be no way to tell how many hours you will work each week on the new job, so no way to accurately calculate your income. If you remain on the old job, the lender can just average your earnings.
Over-Time
Since all employers award overtime hours differently, your overtime income cannot be determined if you change jobs. If you stay on your present job, your lender will give you credit for overtime income. They will determine your overtime earnings over the last two years, then calculate a monthly average.
Self-Employment
If you are considering a change to self-employment before buying a new home, don’t do it. Buy the home first.
Lenders like to see a two-year track record of self-employment income when approving a loan. Plus, self-employed individuals tend to include a lot of expenses on the Schedule C of their tax returns, especially in the early years of self-employment. While this minimizes your tax obligation to the IRS, it also minimizes your income to qualify for a home loan.
If you are considering changing your business from a sole proprietorship to a partnership or corporation, you should also delay that until you purchase your new home.
Top 7 Reasons To Use A Buyer’s Agent In A Real Estate Transaction
(Reprinted with Permission)
Purchasing a home is a big step, and a big decision. The average person spends around 1/3 of their income on their home. The home that you choose has a big impact on your life, and can have a big impact on your finances, as well. It always surprises me when Buyers attempt to “go at it alone” because of the possibility of mistakes. A good Buyer’s Agent is invaluable to a Buyer, and can be the difference between a wonderful transaction, and a nightmare.
- Full Access to the MLS The Multiple Listing Service (MLS) is a powerful tool that only Realtors have access to. When listing agents market a home for sale, they typically allow any Realtor to present the home to potential buyers, and to present contracts for purchase. The MLS is a database of all homes listed by Realtors, and represents roughly 99% of the homes for sale in any given market. As technology advances, so does the MLS. It has evolved into an extremely powerful search engine that allows your buyer’s agent to enter in search criteria, and returns only homes that match those specific parameters. Buyers can find a lot of this information online through IDX feeds available on many websites, but this information is a “watered down” version of the MLS because the IDX search engines aren’t quite as powerful, and don’t return as detailed profiles as the MLS.
- Maximize Your Time While driving neighborhoods is an excellent idea to help you decide which locations you prefer, it’s not a very efficient way to find your new home. Gas is expensive, and your time is valuable. Your Buyer’s Agent will listen to your needs, make fantastic suggestions based on your likes & dislikes, and provide you with a list of homes that ALL match your wants & needs. Your Buyer’s Agent has helped MANY new homebuyers through MANY purchases, and will help you better organize your search & decision making process – saving you valuable time.
- Representation Listing Agents enter into legally binding agreements that require them to ALWAYS act in the best interest of the seller. They are the seller’s “coach” and will make sure that their clients’ best interests are looked after. Luckily, your Buyer’s Agent is there to make sure YOUR best interests are accounted for. With your expert Buyer’s Agent in your corner, you can rest assured that you’re on, at least, even ground with the home seller. A football team would be at a pretty significant disadvantage without a coach – just as you would be without a Buyer’s Agent.
- Negotiating Power The MLS maintains a record of, not only all homes listed by Realtors in a given market, but also the sales price of those homes. Your Buyer’s Agent will run a Comparative Market Analysis (CMA) to determine a prospective home’s Fair Market Value (FMV). In simpler terms, your Realtor will look at similar homes in the same neighborhood that have sold recently. This way, you will know whether or not the seller has their home priced fairly. If the home is priced over Fair Market Value, your Buyer’s Agent can present your “under asking price” offer with plenty of firepower – and a greater chance that the offer will be accepted.
- Experience The average person buys 3-5 homes in their lifetime. A good Buyer’s Agent will assist in 3-5 home purchases every month. What might seem complicated and intimidating to you is fairly common and familiar to your Realtor. Your Buyer’s Agent will know what to expect, and will know when to alert you if anything out of the ordinary occurs.
- Industry Contacts It takes a lot of people to close a real estate transaction – Buyer’s Agent, Listing Agent, Loan Officer, Inspector, Appraiser, Insurance Agent, General Contractors, and sometimes more! A good agent will come with a strong closing team that has performed in the past, and will continue to perform. A transaction is only as strong as its weakest link – with your strong Buyer’s Agent & their closing team, you can rest assured that you will have plenty of support.
- Piece of Mind If you are like most people, your home is the largest purchase you will ever make. The average person spends around 1/3 of their total monthly income on their home. This is a big decision and you don’t want to go at it alone. When you use a trusted Buyer’s Agent, you know that your best interests are accounted for, and that you can feel confident in your purchase.
Purchasing a home can be a fun and exciting process. However, the home buying process can be intimidating, and mistakes are possible. A Realtor who specializes in working with Buyers can help alleviate the fears & possibilities for mistakes. Make sure and use a Buyer’s Agent on any real estate transaction, and you will help ensure that you are making the right decisions.
About the Author
Eric Bramlett currently manages his Austin Real Estate Guide, his Austin Texas Real Estate company’s website, & his Tulsa Oklahoma Real Estate Guide.
