Buying a Home

2016 Edition

About Financial Knowledge Network

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Instructors
Our instructors have a minimum of 10-15 years of experience in the !nancial services
industry. Their backgrounds include previous associations with banks, brokerage
houses, mortgage lending, insurance, and !nancial planning !rms. Many of the
instructors have previous teaching experience as adjunct faculty members with
institutions of higher education and community colleges.
In addition to a college degree, many of the instructors also maintain a CFP (Certi!ed
Financial Planner) credential or are currently enrolled in the CFP Professional
Education Program. Our certi!ed instructors are required to meet annual continuing
education requirements in the !nancial planning !eld.
2016 Financial Knowledge Network, LLC
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Course Description

Participants attending this course will develop a general understanding of the process
involved in purchasing a home. By working through interactive course exercises,
participants will be better able to monitor their home purchase transaction.

Audience
Recommended for !rst time home buyers who desire a general overview of how to go
about searching for a home, analyzing a"ordability, !nancing, o"ers, contingencies, and
closing.

Learning Outcomes

Review important factors involved in deciding whether to rent or own

Identify the costs of home ownership
Calculate how much of a home you can a"ord
Find out how to research neighborhoods and locate the right house based on need
and desired features
De!ne important lending terms
Recognize the di"erence between being pre-quali!ed and pre-approved for a loan
Distinguish between an agent, a broker, and a Realtor
Uncover valuable tips for buyers
Obtain necessary information about home inspections and contingencies
Learn to use six essential guidelines when making an o"er
Describe twelve di"erent types of mortgage loans o"ered!

2016 Financial Knowledge Network, LLC.

Table of Contents
Renting vs. Owning

Ready to Buy a House?

How Much Can You A"ord?

Credit Reports
Credit History
FICO Scores

5
5
6

Down Payments

Amortization Schedule

Home Purchase A"ordability Worksheet

Lending Terminology

10
11

Know Before You Owe

11

Points

11

Annual Percentage Rate (APR)

12

Rate Lock

12

Float-Down Option

13

Private Mortgage Insurance (PMI)

13

Prepayment Penalty

14

Title Insurance

14

Impound Account

14

Understanding Mortgages

15

Fixed Rate vs. Adjustable Rate Mortgage

15

Other Types of Mortgage Loans

16

Banks vs. Mortgage Brokers

17

Pre-Quali!ed vs. Pre-Approved

18

Mortgage Loan Reforms

19

Real Estate Professionals

20

Buyers Agent or Broker

20

Realtor

20

Real Estate Attorney

20

Hiring a Real Estate Professional

21

Buying Process

22

Looking for the Right House

22

Making an O"er

24

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Home Inspections and Contingencies

24

Closing

25

Closing Costs and Fees

26

Suggested Action Items

28

Appendix

29

Correcting Mistakes in a Credit Report

29

De!ne the Dream House

30

Neighborhoods

31

Buyers Needs & Wants List

32

Loan Comparison Chart

33

Buyers Log of Homes

34

Sample Closing Disclosure

35

Additional Information Regarding the New HUD Forms

40

Real Estate Credentials

41

Listings

42

Answers to Workbook Exercises

43

Miscellaneous Issues

44

Home Equity Loans & Lines of Credit

45

Prepaying Mortgages

46

Re!nancing

47

Tax Bene!ts of Home Ownership

48

Capital Gains Exclusion

49

Organizations & Websites

50

Glossary

52

2016 Financial Knowledge Network, LLC.

Renting vs. Owning

An important factor in deciding whether to own or rent is how long an individual plans to
stay in the home. Almost 50% of all homeowners move within the !rst 5-7 years of
buying a home. Consider renting if youll be staying in a home for less than !ve years. If
youre planning to live in a place for a longer period of time, consider buying.
Consider All Economic Factors Including A!ordability, Tax Impact, & Potential Return.

Rent
Frees up cash for investinginvestments
may increase faster than home values

Own
Forces you to save money that might
otherwise be spent

Homes can be considered an illiquid asset,

since the only way to get money out is to
Allows you to build equity over time
sell (other than a home equity loan)
Homeowners pay $1 in mortgage interest
to be able to deduct up to 35 cents in
federal taxesdepending on tax bracket

Maintains control over the cost of living with

!xed mortgage payments

In the !rst !ve years of owning a home,

nearly 90% of the money spent on
mortgage payments goes towards interest

Provides the potential for tax-free

appreciation* while other types of
investments generally require you to pay
capital gains taxes

The large amount of interest paid (which

may reduce taxes) also reduces the
amount of equity that is built

Mortgage interest, points, loan fees paid,

and property taxes are all tax deductible

No need to worry about falling values if

property values decline

Creates sense of responsibility, stability, and

permanence

Homes can be di#cult & expensive to sell

* Subject to certain limits based on tax law

Online Calculators
Use caution when using rent vs. buy calculators on the web as some sites can be biased
towards home ownership. Moreover, many of the calculators require input of
information such as property taxes and closing costs that may be di#cult to estimate.
One of the best ways to calculate whether a particular market is more favorable for
buyers or renters is to compare prices of sales and rental properties with their
respective living costs over a period of time (5 or 10 years).!

2016 Financial Knowledge Network, LLC.

Ready to Buy a House?

Buying a home is one of the biggest purchases most people will ever make. Weigh both
the economic and the emotional factors carefully.

Cost of Home Ownership

Property Taxes

Must be paid annually

Insurance

Homeowners insurance provides property and liability

coverage. Private Mortgage Insurance (PMI) is
generally required by a lender if the borrower makes a
down payment of less than 20% of the purchase price

Utilities

Home Furnishings

New homeowners often need to purchase draperies,

lighting !xtures, and additional furnishings

Household Maintenance and

Repairs

Ongoing expenses such as plumbing, roof repair,

carpet cleaning, electrical, etc.

Yard and Garden Supplies

Many new homeowners do not have some necessary

tools such as a lawnmower, rake, leaf blower, etc.

Remodeling or Home
Improvement Costs

New homeowners often want to paint, install new

carpet, or remodel a kitchen or bathroom

2016 Financial Knowledge Network, LLC.

Electricity
Gas
Water
Cable/Phone
Garbage Collection

How Much Can You A!ord?

When buying a house, try to stretch a little because your income will generally increase
and house payments will generally remain the same. Never buy more home than you
can a"ord.
Currently, households spend between 21% and 54% of their gross income on housing,
depending on age, income level, and geographic area.
The price you can a!ord will depend on six important factors:
Cash Available for Down Payment and Closing Costs
Income Level
Debt Level
Credit History
Type of Mortgage
Current Interest Rates

Front-End and Back-End Ratio

Principal, interest, property taxes, and insurance (PITI)
Housing Expense-to- should not exceed 25-33% of gross monthly income
Income Ratio
(Front-End Ratio) Homeowners association dues and mortgage insurance
are added to the PITI if applicable
PITI plus other monthly long-term debt should not exceed
34%-38% of gross monthly income

Debt-to-Income Ratio
1
(Back-End Ratio) Long-term debt includes car loans , installment loans,
alimony, child support, and balances on credit cards that
will take more than ten months to pay o"

Many lenders may exclude a monthly payment for an auto loan with less than six months remaining.

2016 Financial Knowledge Network, LLC.

" EXERCISE
1. Mary makes $5,000 gross per month. She found the perfect house and has
determined that the PITI will be $1,600. Using the housing expense-to-income
ratio, can Mary a!ord this house?
YES
NO
2. Mary also has long-term debt consisting of a car loan and credit card payments
totaling $500 per month. Using the "gures above and applying the debt-toincome ratio, can Mary still a!ord the house?
YES
NO
3. What is the maximum amount of monthly debt (PITI plus other long-term debt)
Mary will be allowed to carry based on her current income?
A. $2,000
B. $1,900
C. $1,800
4. What does Mary need to do in order to qualify for a home loan?
A. Reduce Her Consumer Debt
B. Look for a Less-Expensive Home
C. Increase Her Down Payment
D. Any or All of the Above
Answers can be found on page 43.

2016 Financial Knowledge Network, LLC.

Credit Reports
Credit History
Credit reporting agencies collect information about consumers and their credit histories
from public records, creditors, and other sources. Credit agencies, however, do not
grant or deny credit. Your credit history is available from credit reporting agencies to
current and prospective creditors and employers as allowed by law. A credit history can
either expedite or hinder the ability to obtain credit. Moreover, a credit history can
provide additional o"ers of credit to individuals.

Obtaining Credit Reports

It is important to request and review personal credit reports from each of the three large
credit reporting agencies listed below annually. Note that each one is independently
owned and operated so your information can vary with each agency.
Consumers can request free copies of their credit report every 12 months from each of
the three main credit reporting agencies through the website
www.annualcreditreport.com or by mail:
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281
Phone: 877-322-8228
You always have the right to receive a free copy of your credit report within 60 days of
being turned down for credit, housing, insurance, or employment because of poor
credit. Free reports can also be obtained if you are unemployed & looking for a job,
receiving welfare, or believe your credit !le is inaccurate because of credit fraud.

Credit Reporting Agencies

Equifax
(800) 685-5000
www.equifax.com
Experian
(888) 397-3742
www.experian.com
TransUnion
(877) 322-8228
www.transunion.com
See the Appendix for help correcting mistakes on your credit report.

2016 Financial Knowledge Network, LLC.

FICO Scores
Statistical Analysis
Mortgage and credit card lenders, employers, insurance companies, landlords, and
others use FICO scores developed by the !rm Fair, Isaac & Co. Credit scores are
compiled using statistical analysis of ones credit history. FICO credit scores range from
300 to 850.

Important Elements
FICO credit scores are now generally revealed with a persons credit report from the
three main credit reporting agencies. The !ve major components in a credit report and
the relative weight of each include:
Past Payment Performance (35%)
Amount of Debt (30%)
Length of Credit History (15%)
New Credit (10%)
Types of Credit (10%)

Change in Score
Credit scores can drop very quickly if the maximum amount is charged on credit cards
or even just a few bills are paid late.

Credit Scores & Interest Rates

The higher the credit score, the less an individual can expect to pay in interest on a loan.
For example, on a $300,000 30-year, !xed-rate mortgage:
FICO Score Interest Rate* Monthly Payment
760-850

3.301%

$1,314

700-759

3.523%

$1,351

680-699

3.7%

$1,381

660-679

3.914%

$1,417

640-659

4.344%

$1,492

620-639

4.89%

$1,590

SOURCE: MYFICO.COM.

* Interest rates stated here are for illustration purposes only. Rates change daily, but the
relationship between credit scores and interest rates remains the same.

2016 Financial Knowledge Network, LLC.