Buying A Home

Purchasing a Home

How much home can I afford?

Traditionally, lenders required borrows to have a Front End Ratio of 28% and a Back End Ration of 36% to qualify for a mortgage. These rations are based upon based on PITI (Principal + Interest + Tax + Insurance) compared against your total income and your total income less other debt.

While many lenders have relaxed these ratios, the are still a good startnig point to determine how much of a home payment you can afford. It is especiially important to do some soul searching here since may people over the last year have gotten into trouble because the banks loaned them more than they could afford to pay back and the real estate market had a temporary downturn so yout focus should be more on how much you can afford rather than how much the bank will lend you.

I also recommend that you start out looking at fixed 30-year financing when estimating how much home you can afford, although you may end up switching to an alternative form of financing tailored to your specifc needs when you are actually ready to buy.


How much much money do I need for the down payment?

While 100% financing is available from most lenders, you will pay a higher interest rate for this kind of financing. Mortgages with less than 80% loan-to-value ratio (LTV) will require Private Mortgage Insurance or PMI which adds about an additional .8% per year to your payment. To avoid this many people get an 80-10-10 loan which is an 80% LTV mortgage piggybacked with a 10% second mortgage.

You may also buy down the loan rate by paying points on the loan. A point is a 1% interest payment made at the beginning of the loan that reduces the overall rate of the loan. Points may be written off as mortgage interest on your income taxes and may be financed in with the loan on the purchase of a home. In general, 1 point reduces the overall loan interest rate by 1/8%, so it usually only makes sense to pay them when you know for sure that you will be keeping the loan for more than five years. Some lenders offer negative points which in effect allow you to obtain a no-fee mortgage by paying a higher interest rate.

Rates for 15 and 30 year fixed rate loans are driven by the long term bond market while rates on Adjustable Rate Mortgages or ARMs are driven by short term interest rates. Because these markets are loosely connected, there can quite a discrepancy between the two rates. In general, fixed rate mortgages are more favorable to the borrower since you are protected from rising interest rates, however you are able to refinance if rates were to go down.

A Jumbo Mortgage is a mortgage with a loan amount above conventional loan limits (currently $417,000) which are set by Fannie Mae (FNMA) and Freddie Mac (FHLMC) and refer to the maximum dollar value of any mortgage which they will purchase from an individual lender (Fannie Mae and Freddie Mac are large agencies that purchase the bulk of residential mortgages in the U.S.)

Since today’s fixed and adjustable interest rates are about the same, my recommendation is to start your financial planning by looking at no-point/no-fee 80-10-10 loan which will give you the best balance between a good rate and the best purchasing power.


What comprises my monthly recurring costs?

Your monthly reourring payments will consist of the total of the following items:

Princial on the Loan Fixed loans are usually amoritized over 15 or 30 years. The total payment consisting of principal and interest is the same amount each month over the life of the loan.

The principal part of the payment goes to pay down the balance of the loan and the interest for that month is calucalted on the remainprincipal after the previous payment was made. Becuase the amount of the loan is going down each month, the amount if interest that is owed each month also decreases,while the amount paid toward the balanc of the loan increases. In the beginning of the loan, most of the payment goes toward the interest and at the end loan most of the payment goes toward principal.

Interest on the Loan The monthly interest amount is calculated by taking the current loan balance and multipliing it times the annual interest rate dived by the number of months (12).

Interest on your first (or second) home may be deducted from income for Federal and California State income tax calculations.

Property Taxes Property tax are made up of several parts. Prop 13, which was passsed by California voters in 1978 limits taxes on real property to 1% of it’s accessed value and also limits the accessed value from increasing more than 2% per year.

In 1982, the Mello-Roos Community Facilities Act allows county, city, special district, and school districts to establish a Mello-Roos Community Facilities District or CFD which allows for financing of public improvements and services. It is important to note that Mello-Roos taxes are not based on the accessed value of a property, and the apparent tax rate tends to decrease as a percentage of a properties value as it transferred to a new owners and tax-base is reaccessed to the market value.

In Addition to the base rate and Mello Roos, property taxes include bond measuers such as school bonds and accessments such as street sweeping and mosquito abatement.

Property Taxes may be also deducted from income for Federal and California State income tax calculations.

Home Owners Insurance Lenders usually will require you to purchase a home owners insurance policy which covers both damage to your property and your liability or legal responsibility for any injuries and property damage caused to other people. Damage caused by most disasters is covered but there are exceptions such as damage caused by floods and earthquakes. Although lenders usually don’t require it, additional insurance can be purchased earthquakes and floods.
Home Owners Associations Most of the new homes in the Chino Valley have Home Owners Associations or HOAs. When you purchase a home that has an HOA, there will usually be Covenants, Conditions & Restrictions (CC&Rs;) that have been attached to the deed that will restrict the manner in which the property can be used and also enable the assoctation to chage dues for such purposes as paying for insurance and to maintainnig common property.

Condominiunms and townhouses ususally have HOAs in order to maintain the common areas such as garages and roofs, and many Single Family homes have HOAs in order to maintian common areas such as pools, clubhouses, green-belts, playgrounds, and association owned streets.

Private Mortgage Insurance (PMI) If the Loan-To-Value (LTV) ratio is less than 80%, most lenders will require or PMI. PMI is relatively expensive runing as high as .8% per year or more.

In 2007 the Federal Income Tax law has been changed to allow filers with adjusted gross incomes of less than 100,000 to write off PMI.

Note that many people use a “Piggy Back” second mortgage instead of a loan that requires PMI.  Now that PMI is tax deductable, you will really want to run the numbers on both kinds of mortgages to see which loan meets your needs the best by saving you money and/or lowering your monthly payment.


What closing costs will I have to pay?

Your one-time closing costs consist of the following items:

Down Payment The downpayment is the cash equity that you putting into the purchase and usually consists of the purchase price less the amount borrowed.
Origination Points Orination Points are prepaid interest on the loan that effectly buys down the interest rate of of the loan. In addition, Loan Brokers may somestimes charge additional loan fees in addition to the profit they make on the wholesale loan rate as points. Points sometimes be fiananced into the loan or negative points may be charged to reduce the processing fees associated with a loan.
Appraisal Fee The lender will require an independent appraisor to estimate the value of the property in order to make sure that the Loan-To-Value ratio is based upon the market value of the property and not just the price you are paying for the property.
Loan Fees In addition to points and the apprisal fee, you may be required to pay other fees such as loan processing and loan underwritring. Some people consider these fees to be “junk fees” since they are services being performed either by the loan broker or the direct lender who are arleady being compensated for the loanl; however, you will find them included on almost every loan made.
Escrow Fees In California, Escrow companies act as dual agents representing both the buyer and act as a neutral third party to procees the paperwork associated with a real estate transaction. Most escrow companies charge a standard set of fees which are generally competitive across the industry. Escrow companies ususally break their fees up for services such as notary, deed recording, arranging loan payoff and funcing, etc.

The Escrow Company is usually selected by the seller and escrow fees are usually split between the buyer and the seller. Title Insurance is ususally based as a small base amount plus a percentage of the purchase price of the property.

Lender’s Title Insurance Title Insurance protects you against human error and fraud that might cause the transfer of title to a property to be invalid. Part of the the title insurance process will be for the title compant to submit a report to you identifying the chain of title to the property along with any recorded easments or liens.

In Southen California, the seller usually pays for an owner’s title insurance policy that protects the buyer from a defect that prevents the transfer of title to the property. This protects both the buyer and the seller since tecnically, the seller could be liable for damages to the buyer if there was a problem with the title to the property. The lender will require a second, separate title insurance policy that is usually paid for by the buyer.

Title Insurance is ususally based as a percentage of the purchase price of the property.

In 2007 the Federal Income Tax law has been changed to allow filers with adjusted gross incomes of less than 100,000 to write off PMI.

Note that many people use a “Piggy Back” second mortgage instead of a loan that requires PMI.  Now that PMI is tax deductable, you will really want to run the numbers on both kinds of mortgages to see which loan meets your needs the best by saving you money and/or lowering your monthly payment.

Prorated Property Taxes Property taxes in California are based on a fiscal year that runs July 1st through June 31st. The standard California Association of Realtors Residential Purchase Agreement contains a clause that property taxes will be paid current as of the close of escrow and prorated between buyer and seller. The first half of the property tax bill for the fiscal year starting in July is not due until December 10th and the second half is due April 10th of the following year. Escrow will bring the property taxes current and calculate the proration crediting the seller with any excess taxes that are charged to the buyer.Property taxes in California are based on a fiscal year that runs July 1st through June 31st. The standard California Association of Realtors Residential Purchase Agreement contains a clause that property taxes will be paid current as of the close of escrow and prorated between buyer and seller. The first half of the property tax bill for the fiscal year starting in July is not due until December 10th and the second half is due April 10th of the following year. Escrow will bring the property taxes current and calculate the proration crediting the seller with any excess taxes that are charged to the buyer.
Home Owners Insurance
(First Year)
Most lenders will usually require that Escrow pre-pay the first years Home Owners Insurance policy.