Another Ratio Example

Let’s take the previous example, keep the income the same but increase the total of monthly debt payments to $1,200.

Keeping the proposed house payment of $700, the front-end ratio remains the same ($700 divided by $4,000 income is still 17.5%) .

However, with the higher debt payments, the back-end ratio jumps to 47.5%, much more than usually allowable. As a result, this family needs to either pay off some debt so the recurring payment doesn’t “count against them” or buy a less-expensive home.

We’ll look at one more example in the next post – calculating ratios in reverse – so you’ll know what kind of house you qualify for given income and debt payments.

For more information on getting prequalified, learning more about loan ratio limits, and purchasing your first home, visit our website at www.springfieldfirsthome.com or call/text us at 417.872.9222. 

An Example on Ratios

In the previous post, we talked about what ratios are. Now, let’s look at an example.

Let’s assume that a family has monthly income of $4,000 and monthly recurring bills of $600 including a car payment and credit card minimum payments. They are looking at a $120,000 house. Do they meet the loan standards?

First, the monthly payment on the house, with estimated property taxes and insurance, after a downpayment, is about $700 (example only). The family’s “front-end” ratio – that is, the percentage of income that would be consumed by the house payment – is 17.5%, well under the maximum of 28%.

Next, we’ll add the $700 of proposed house payment to the $600 of recurring monthly debt payments to get $1300 for total monthly payments. Therefore, the family’s “back-end” ration – that is, the percentage of income that would be consumed by the house payment plus other payments – is 32.5%, less than the usual 36% limit. Thus, for this loan, with those ratio requirements, this family qualifies for this house.

Keep in mind that that a significantly higher-priced house would certainly cause a problem on that second ratio.

This is an example of how ratios are used to qualify homebuyers. We’ll look at another example in the next post.

For more information on debt-to-income ratios and how they can affect your home purchase, or just buying your first home, visit our website at www.springfieldfirsthome.com , call/text us at 417.872.9222.

What is a Ratio?

Here’s yet another term we use in real estate that consumers don’t understand until they get into the home buying process, but we tend to throw it around like everyone knows what it means.

When a lender qualifies you for a mortgage loan, they count up all your individual or joint income. Then they count up all the payments you make on debt, like car payments, credit cards, student loans, and things like that. Then, they start calculating ratios.

The first ratio, many times referred to as the “front-end ratio” is the percentage of your income that would be consumed by the house payment, including taxes and insurance. The second ratio, or “back-end ratio” is the percentage of your income that would be consumed by the house payment and other debt payments.

We won’t get into specific loan ratio limits of the different loan programs here, but a general guideline to use is 28% on the front-end, and 36% on the back-end, which are the usual ratio limits of conventional mortgages.

In our next post, we’ll talk about examples of calculating ratios.

For more information on loan ratios and purchasing your first home, visit our website at www.springfieldfirsthome.com, or call or text us at 417.872.9222.  

Our Opinions on Dual Agency (Third part in a three-part series)

In our last two posts, we discussed what dual agency and transaction brokerage are and how they create two different options that exist when an agent is involved in both the listing and the selling sides of a transaction. Here, we voice our opinion on which is better.

There is a real difference between agents and brokers on how they view these options, and many people in real estate want to move away from the concept of disclosed dual agency. In some states and markets (not Springfield), dual agency has either been removed as an option or has fallen out of practice.

We continue to believe that there is a benefit to dual agency and that it is preferable to transaction brokerage, primarily for two reasons.

First, while we acknowledge that during negotiations such as price, when the agent becomes a facilitator, it is necessary not to become an active participant for one side or the other, this is neither a bad thing nor, if it were, is this fixed by transaction brokerage. Secondly, the notion that in having a listing agreement or buyer agency agreement with a party and proclaiming oneself as that party’s agent, only to convert that relationship to a non-fiduciary one just runs counter to our philosophy. Real estate is about land, but the real estate business is about people, and we really don’t wish to “convert” our relationship with people to one with paperwork.

If you have more questions about dual agency, or about purchasing your first home, please visit our website at www.springfieldfirsthome.com or call/text us at 417.872.9222. 

Transaction Brokerage (Part two of a three-part series)

Transaction Brokerage was designed, and is used, as an alternative to dual agency in that when an agent is faced with representing both sides, he or she can “convert” his existing brokerage relationship from agency to transactional brokerage and change the agent’s fiduciary relationship from one in which he represents a person to one in which he represents the transaction itself.

We know – we may have lost you there. Let’s use an example. Sharon has a listing on Smith Street. She has an open house and a buyer visits and likes the property well enough to write an offer. Sharon now has three options. She can represent only the seller, since she has a pre-existing agency relationship with the sellers. She could also enter into a buyer agency agreement with the buyer and therefore be a dual agent (her pre-existing agency relationship with the sellers plus her new agency relationship with the buyers) as discussed in the last post. Sharon may also become act under transaction brokerage and assist both sides without creating agency to the buyer and therefore “converting” her relationship with the sellers to transaction brokerage.

It may sound a little more complicated than it is. The bottom line here is that some people just don’ t think that an agent can adequately and fairly represent the interests of both sides, and by using transaction brokerage, she is, at a minimum, telling both parties that she will be working to get the deal closed, but won’t necessarily be working for anyone’s interests except the transaction.

If you have more questions about transaction brokerage or in purchasing your first home, visit our website at www.springfieldfirsthome.com or by calling or texting 417.872.9222. 

Dual Agency (First of a three-part series)

Dual agency exists when the listing agent of a property also has an agency agreement with the buyer, therefore representing both parties. You might run into a situation like this.

One way this can happen is if you hire a buyer’s agent to work for you, and he or she happens to have a listing that you look at and then write an offer on that home. Another way is if you were to go to an open house and strike up a conversation with the listing agent holding it open, and when you decide to write an offer, that too is done by the listing agent.

Dual agency can be tricky, mainly for the agent. Both sides must be represented fairly and equally, without any disclosure to the other side as to the motivations or confidential information of the other. At times when negotiation is called for, such as the price or other terms of the contract, the agent must act in the role of “facilitator,” and take special care to negotiate on behalf of just one side. There can be no disclosure of how low the seller will go or how high the buyer will go.

In the next entry, we’ll discuss an alternative to dual agency, transaction brokerage.

For more information on this or other issues regarding the purchase of your first home, visit our website at www.springfieldfirsthome.com or call/text 417.872.9222. 

Don't Lien on Me!

In the purchase of a home, a buyer should beware of these pesky things called liens (yes, pronounced like “lean”) that can pop up and make you responsible for someone else’s problem.

When someone does work on a home, they expect to get paid. When they don’t, they put a lien on the property, which basically says, “Even if we have to wait until this property is sold, we’re going to get our money.” These are called mechanics liens. Liens placed on a property because the materials for the work wasn’t paid are called materialman’s liens. Especially when you’re using financing to purchase a home, those existing liens need to be taken care of by the seller before or at closing. Your lender and title insurer will require it.

One of the most confusing parts of this is that these liens for work done on a house prior to your ownership can show up after your purchase if they don’t get filed prior to closing, but are still valid. You may, especially on new construction or on a house recently renovated, want to consider getting lien coverage on your title insurance during the closing process. Many title companies don’t even charge for this service, though it may slightly slow down the closing process.

For more information on purchasing your first home, visit our website at www.springfieldfirsthome.com or text or call 417.872.9222. 

A Roof is Good Until It’s Bad

Here’s an answer that will make people stop in their tracks – right before they hit you. The question? For how long is a roof good before it needs to be replaced. The answer? Until it goes bad.

You might have heard people talk about things like a 20 or 30 year roof, which is an estimate of manufacturers of roofing materials about how long a roof will last. But when it comes to real estate transactions, those numbers are somewhat meaningless.

Let’s say a “20 year roof” was installed on a house in 1992 (that would be 20 years ago, kids). When you go to look at the house, and find out this information, is that fact a defect with the house? No – unless, of course, there’s something wrong with the roof. If it’s leaking, structurally unsound, or otherwise defective, that’s different. But in most real estate contracts, age itself, or age in relation to the roofing material, is not in itself a problem. In other words, just because it’s old, doesn’t mean it’s bad.

There are some exceptions to this rule, but mainly limited to financing or insurance availability. Some financing programs require the roof to have at least three, five, or even longer in “effective life,” and the appraiser will make that determination or ask a roofing expert to certify that is the case. If the roof doesn’t meet those standards, then the lender can’t make the loan and the house doesn’t get purchased. Similarly, if the buyer can’t get homeowner’s insurance because of insurance company standards, the same thing happens.

However, absent these issues, a roof is good until it’s bad. Pretty smart, huh?

For more information on purchasing your first home, visit our website at www.springfieldfirsthome.com, or call or text 417.872.9222. 

The Buyer’s Market May Be Ending

Unless you’ve been living under a rock, or just totally ignoring news for the last couple of years (which isn’t such a bad idea, by the way), you know that mortgage interest rates are at record lows. And while you might not know it, home affordability, or the monthly payments of homes compared to incomes, is at record or near record levels.

Therefore, there are two things that seem to be holding people back from buying a home at this point – fundamentals and expectations.

By fundamentals, we mean things like income and credit issues. This has been a bad recession, and as a result, some people just don’t have the income to make the investment in a home right now. Some people have seen their credit rating suffer as a result of a job loss or change in income, and with the higher credit standards that the banks are using these days (which aren’t really different than they were 10 years ago but are significantly different than they were during the bubble) some people simply can’t buy right now. And that’s completely understandable.

By expectations, we mean someone’s reluctance to purchase now because of the expectation that prices will go down even farther than they have already. And this is the factor that may change the most this Spring. Due to decreased inventory of homes on the market, other than investor-grade homes, median and average prices may increase this year for the first time in a while, and median and average prices already seem to have stabilized.

As a result, those waiting based on expectations may find themselves paying more for a home than they would if they started the process now.

For more information on purchasing your first home, visit our website at www.springfieldfirsthome.com, or call or text 417.872.9222. 

Thinking About the Could-Be-Perfect Home

Sometimes, a buyer will consider a home that doesn’t really meet their wants or needs, but they picture the property after they have done some work to it and decide that it “could be” the “perfect home” after those changes were made.

However, sometimes those changes pictured by the buyer includes adding-on to the property.

In most cases, it’s not really the mechanics of adding a room, or rooms, to a home that is the hardest part of the process, and if you’re thinking about the purchase of a home to which you would like to add, here’s a few things to think about: 

1. Bulding Codes – You will want to make sure that the addition is built in accordance with local (state, county, and/or city) building codes. This could involve hiring a licensed contractor, or including features that could cost you more than you planned on.
2. Zoning – Make sure the plans you have aren’t in conflict with city or county zoning with regards to the size of the house or it’s capacity or design.
3. Subdivision Rules – If the house is located in a subdivision, or has covenants and restrictions that affect the size and design of the house (and any additions), you’ll definitely want to check those rules out before starting your project. Most subdivisions also have rules about how close an addition can be to the property lines (called “setbacks”).

This is probably not an exhaustive list of all the things to think about, but don’t just buy a home with the assumption that you can add on to it or make it larger to fit your needs. There’s some research to do first.

For more information regarding the purchase of your first home, check out our website at http://www.springfieldfirsthome.com or call or text us at 417.872.9222. 

Sellers Paying Closing Costs

So now that we have discussed what closing costs are, let’s look at how they can impact the transaction.

Let’s say you’ve found the perfect home and the price is $100,000. If you use FHA financing, the minimum downpayment you’ll have to have is $3,500 (3.5% of the purchase price). You might (ßnotice the word “might” here – we’re not in the lending business so we shouldn’t give a real figure here, other than for illustration) have closing costs of about $3,000. In this scenario, you as the buyer will need a total of $6,500.

A lot of people might have the $3,500 for the downpayment, but another $3,000 may be difficult to come up with at any one time. Therefore, many buyers ask the seller to cover their closing costs by writing in such a term in the offer, basically saying, “I’ll buy your home for $100,000 if you pay my $3,000 in closing costs.”

There are two things to consider here. First, keep in mind that by agreeing to the above, the seller is really only getting $97,000 for their home ($100,000 sales price - $3,000 buyer closing costs) in addition to their own closing expenses. Sometimes a seller can/will consider this, while other times they won’t/can’t.

The other issue comes when the seller says, “I’ll pay your closing costs so you won’t be out of pocket for those expenses, but I want the full $100,000 for my house.” Situations like this sometimes result in the final contract price being above the original list price. What the seller is essentially saying here is, “I’ll pay your closing costs of $3,000 if you pay $103,000 for the house.” This can be done, but only if the house ends up appraising for $103,000 or more, which can sometimes be difficult since the appraiser has to defend the value he or she places on a property on behalf of the lender, especially under the present regulatory scrutiny.

Bottom line: The seller can, and often does, pay the buyer’s closing costs, but it has an impact on what the final agreed-upon contract price comes out to be, and can have another impact on loan approval. All of these factors should be considered when thinking about the seller paying these costs.

For more information on purchasing your first home, check out our website at www.springfieldfirsthome.com or by calling or texting us at 417.872.9222.