Front
ratio is all your expected housing expenses divided by
all your income. Let's say you make $30,000 per year ($2,500 per
month) and want to buy a small home or condo. To calculate your
front ratio use the following example:
$650
Principal and Interest (result from a mortgage
calculator)
+ $100 monthly taxes (may be obtained from a Realtor)
+ $ 50 monthly insurance (insurance
agent can estimate)
$800 PITI (Principal Interest Taxes Insurance)
Now
we divide the PITI amount from above by monthly
income:
$800 = (Principal Interest Taxes Insurance)
$2,500 = ($30.000 annual income/12 months)
= .32 = 32% FRONT RATIO
Back
ratio is ALL your debt payments divided by all your income
$800 PITI (Principal Interest Taxes Insurance from above)
+ $100 Car payment
+ $ 50 Student loan
+ $ 50 Credit card payment
$1000 Total debt related expenses
Now we divide the total debt related expenses from above by monthly
income:
$1000 = (Total
debt related expenses)
$2,500 = ($30.000 annual income/12 months)
= .40 = 40% BACK RATIO
IN
THIS EXAMPLE THE RATIO WOULD LOOK LIKE THIS: 32/40
Generally,
the lower your numbers are the better your chances of qualifying.
However, all that really matters is that you qualify. Different
lenders require different ratios, so don't give up if you get turned
down. Loan denials are common and don't necessarily mean you won't
be able to get a loan from another lender. The fact is that some
are very picky and some have guidelines which make no sense at all.
GETTING QUALIFIED FOR A LOAN:
Although
a pre-qualification letter is simply a lenders opinion that you have
a good chance of getting approved, they are much better than nothing.
As a buyer it is in your best interest to get a pre-qualification letter
from any company whether you actually end up using them or not. You
should never feel committed to a specific lender when asking for a pre-qualification
letter. Although you may be asked for a fair amount of information during
the pre-qualification process, it is usually not near as much as during
the pre-approval process. Getting approved usually involves a complete
credit check and verification of all your financial and employment information.
Pre-approval is much better than pre-qualification. It means a lender
has actually approved you for a certain loan amount based on their verification
of all your information. You should do some shopping to make sure you've
found the lender you will probably use before going through the complete
approval process.
Use
a Realtor to help you to find your home. They do more than you may know.
Below are just a few of the benefits of using a Realtor:
Above
all, a good Realtor should be available. They should be able to get
answers for you quickly and be responsive to your needs and concerns.
Time
is money. Each client may have different objectives. For some, time
is of the essence. Others are more concerned about price. Realtors should
be experts at pricing homes and negotiating purchase prices based on
the unique needs of their clients. A Realtor can help save time, money
and headaches. A Realtor should work full time to help make their clients
dreams come true.
A
Realtor's job is to provide you with as much information as possible.
A Realtor should be able to provide you with all the details on the
home including size, neighborhood, utilities, zoning, restrictions,
etc. A Realtor should be able to recommend a good home inspection company
which will provide you with valuable information on any defects in the
home so that surprises will be less likely. A Realtor should also be
experienced in negotiating the best price on your home based on the
inspection report. Even after a buyer makes an offer, the price is most
often still negotiable based on the inspection. Realtors often can give
you valuable information about neighborhoods, proposed developments,
and construction projects which may directly affect the value of a home.
Home
sales have many legal requirements associated with them that most people
are not aware of. Often, laws vary not only by state and county, but
by city and neighborhood. A Realtor will help ensure all legal requirements
are met so that you can buy or sell your home and not have to worry
as much about possible problems in the future.
A
Realtor should be able to recommend a title company which will insure your homes title and compensate you if there are any
liens you may not know about. There are many companies and types of
title insurance policies that a Realtor should be able to guide you
in selecting. Often there are circumstances when increased title coverage
is very advisable such as newly constructed homes or recently remodeled
homes. A Realtor can explain why you may want to choose one title policy
over another.
A
Realtor should also be able to recommend a good home inspection company to you. A home inspection can be a valuable tool both for information
and negotiation. It is wise to get a home inspection to learn of potential
problems. A Realtor can protect your deposit by ensuring your right
to review an inspection report before making a final decision on whether
to purchase the home or not. A Realtor should also be skilled at determining
to what extent price may be negotiated based on the inspection report.
Finally,
a Realtor should be able to recommend a good home warranty company to you. Not all companies are equal. One company may offer a
cheaper standard home warranty policy, but it may not cover near as
much as another company's standard policy. Again, cheaper is not always
better. A Realtor should know what company may offer the best value
and should have experience with them. A home warranty insures many parts
of your home and will replace items covered in the policy if there is
a problem down the road.
A
Realtor should be able to help set up realistic deadlines for your purchase
contract to protect your deposit while giving your offer the best chance
at acceptance. Usually one of the more important deadlines is the "loan
denial deadline". A Realtor should be able to guide you toward
lenders which they have had good experiences with. A lender can easily
make or break a deal if they don't get things done in time. Even if
a lender doesn't break a deal, they can cost you hundreds if not thousands
of dollars if they are not quick and accurate.
Sometimes
seemingly insignificant details can make all the difference, especially
in a situation where there are multiple offers. Homes priced
low sell extremely quickly and have multiple offers. A Realtor
should be constantly monitoring the market so their clients can take
advantage of these deals as soon as they hit the market. A Realtor should
also have a strategy for helping their client strengthen their offer
in any way possible so it has the best chance of acceptance. Following
are several points of negotiation which buyers may not be aware of:
When
you are ready to buy, make sure you get pre-approved. Choose any lender
you want. Your best option may be online or it may be a local mortgage
broker or loan officer. Online lenders will usually not give you the
same level of personal service and speed you will get from a local mortgage
broker or loan officer. If you are hoping to get a good deal on a home
in the Provo/Orem area, you will need to choose a lender that you feel
will get the job done quickly. Homes priced under market will often
have multiple offers. The difference between acceptance and rejection
of an offer is often the perceived strength of the buyer and the deadline
dates stated in the purchase contract. Almost all residential real estate
contracts in Utah contain a list of deadlines which the buyer offers
the seller. Generally, the closer those deadlines are, the stronger
the offer will be. A couple of those deadlines are related to the loan.
If a buyer offers shorter deadlines, it shows how confident they are
of being able to close the deal. If a buyer makes an offer with shorter
deadlines and is pre-approved the seller won't have to worry very much
at all about the deal falling apart. Sometimes a seller will turn down
a much higher offer from another bidder because their deadlines are
too far out or they are not pre-approved. Don't let this happen to you.
The cheapest loan is not always the best. Some mortgage brokers
may charge more "points" than another, but they may be worth
the extra money. An experienced mortgage broker can be extremely valuable.
If you are using a broker, ask them how long they have been doing business
and how many loans they have done. Try to find one that is confident
they can get a deal done in under three weeks. If you make an offer
on a home and put down a deposit of $1000, that money is at risk if
any of the deadlines are missed. Usually the loan deadlines are the
most critical. If they are missed because a lender is too slow it can
be very costly to the buyer. A buyer may lose their deposit or may be
asked by the seller for more money to keep the deal together. Don't
let this happen to you!
Paying
points on your loan can be a difficult decision. The calculator and
explanation in the link above make it very easy to see how long you
need to own your home to make points profitable. Basically, if you will
not be owning your home for long enough to recover the cost of the points,
you are throwing money away. |
(If
you already know you want to use a professional, skip to STEP
2)
Deciding
whether to use a professional to help you sell your home is the most
critical decision. There are some circumstances where you may not want to use a Realtor. If you meet the following conditions, you probably
wouldn't benefit from a Realtor:
-
You have a lot of time
- Selling a
home is far more than just finding someone who wants to buy it.
Closing the deal may require a large amount of your time. Below
are just a few of the things to make sure to allow time for:
- Learn
all the aspects of a purchase contract and how it can protect
you
- Verify
that any purchase contract offered does not contain hidden
clauses which are not to your benefit
- Learn
how to effectively counteroffer and otherwise negotiate
- Learn
what you are liable for in a sale and ensure that you are
protected
- Learn
what disclosures you must make and ensure they are signed,
copied and provided to all parties as may be required
- Ensure
that all required paperwork is signed and initialed by the
correct parties at the correct time and in the right spaces
and order and that they are dated as necessary. This is extremely
important.
- Ensure
that all other legal requirements are met.
- Shop for
a title company to handle your side of the transfer. They
are not all equal.
- Learn
what documentation the title company may require of you and
make sure to provide it quickly.
- Familiarize
yourself with the documentation the title company provides
you so you can verify their information. This is also extremely
important.
- Verify
your buyer is actually able to purchase the property by learning
what paperwork to request from them and then verifying it.
If they are unable to perform, it is to your benefit to find
out as soon as possible.
- Verify
how much money the buyer will be putting down on the home
and that the home will appraise for enough to cover what they
will be financing. A standard conventional loan will only
cover 80% of the value of the home.
- Check
up on the Buyer's lender to make sure things will be closing
on time
- Check
up on the title company to make sure there are no problems
with your title.
- Check
up on the Buyers title company (if they are using a separate
one)
- If you
have a loan or multiple loans on your home, make sure to read
your loan documentation or contact the lenders involved to
ensure that you will be able to convey title to the buyer.
Not all loans are the same.
- There
are several types of insurance commonly purchased during the
transfer of a title. Study which ones will protect you best
and purchase one if you want to avoid potential problems.
- You own
your home outright:
- If you own
your home outright, it will not cost you anything to sit around
and wait for months for an offer. If the home you are trying to
sell is financed, then every day that goes by is costing you money
in interest and insurance expenses which could go into your next
home.
- You know
all the details of real estate transfers or you know someone who you
trust to guide you.
- Real estate
lawyers, certain tax and investment professionals, mortgage brokers,
builders, developers, and other similar professionals may know
enough to competently close a deal or they may know of someone
who can guide them. These professionals will often still have
a hard time finding the required amount of time to deal with a
sale.
- STEP
2-
- Above
all, pick a Realtor which will be responsive to your needs and concerns.
- A successful
Realtor will generally be busy. This does not mean that you should
ever feel like a number on a file. If you can't talk to a Realtor
immediately, leave a detailed message and you should hear back
from them within an hour. Below are some traits of a good Realtor:
- A Realtor
should be honest with their seller. By law, a Realtor has
a strict fiduciary duty to a seller. You should be able to
trust them implicitly to guard the confidential information
you provide them.
- A Realtor
should work for a reputable company which you have heard of.
A company with greater national exposure can be important.
If you feel more comfortable with them, chances are a buyer
will too. Also, their advertising budget is generally much
higher and their agents usually receive better training because
the company has a reputation to protect. Some smaller companies
offer little or no training to agents which may not be much
better equipped to sell real estate than you!
- A Realtor
should not keep a client waiting any longer than absolutely
necessary. If you cannot reach your Realtor immediately, you
should receive a call back as soon as he/she is off the phone,
out of a meeting or back in range of their cellular network.
- A Realtor
should be an expert at listening to your desires. You should
be informed on the market and other conditions which may affect
the sale of your home.
- A Realtor
should be able to price your home and provide you details
on how they arrived at that price. Those details should consist
of market data and the unique features of your home. If you
have upgrades, they should be taken into account. Of course,
the decision to list above or below the price suggested by
a Realtor always lies with the seller.
- A Realtor
should be able to explain the consequences of listing high
or low.
- A Realtor
should be able to provide you with different marketing strategies
and should be able to explain the pro's and con's of each.
- A Realtor
should be familiar with contracts and know how to recognize
and protect against different negotiation techniques which
might be used by buyers to the disadvantage of their seller.
- A Realtor
should provide their client with all pertinent information
as soon as possible.
- A Realtor
should be empathetic to your situation. Often selling a home
is a stressful time even at its best. Details should be explained
in a way you can easily understand and puts your mind at ease.
- A Realtor
should be polite, but firm. There are a lot of nice people,
but not all nice people are good negotiators which will get
you top dollar for your home.
- A Realtor
should be solvent, confident and patient. A desperate person
usually has their immediate needs above yours. There are many
signs of desperation, but a dead giveaway is a high pressure
sales pitch and a lot of fast talking. Realtors should be
more educator than salesman and you should always feel educated,
not pressured after a meeting with a Realtor. Remember, you
are the boss.
- A Realtor
should embrace technology and should be a master of marketing.
Your home should have all the exposure necessary to sell it
as quickly as possible. Some properties will require different
marketing than others.
- Finally,
a Realtor should feel like a friend. You should feel comfortable
calling them and they should know you by your first name.
- STEP
3 -
- A Realtor
can guide you through negotiation, but it is up to you to decide how
much you are willing to give.
- If the buyer
will not pay for a home warranty, you may want to offer one. It
will give you peace of mind and can be a great value
- If an offer
is weak, a Realtor can guide you on how to handle it
- If there are
multiple offers, a Realtor can help you determine which one is
the best. Sometimes the highest offer is not the best. There are
many factors which affect the relative strength of an offer.
- A Realtor
should be able to recommend a good title company, but the decision
is yours.
- Try to find
a reputable title company that will be responsive to your needs
and will be able to close at a time that is good for you.
- A Realtor
can help you purchase your next home and should offer a discount for
the repeat business.
- Try to find
a Realtor that will be willing to help you move.
- If you are
not moving locally, your Realtor should be able to refer you to
someone out of state who will be familiar with your needs and
can start helping you right away. A real estate company with national
connections can help a lot.
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