fcs340_document_housingMarketAssignment

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Brigham Young University, Idaho *

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340

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Finance

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Apr 3, 2024

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Housing Market Assignment Purpose: The purpose of the housing market assignment is to help you understand the financing portion of buying a home. This is not an assignment where you will be picking out the perfect Home for your family (now or in the future). This assignment is help you prepare for the exam by going through the steps to buying a home. Please make sure to answer all the questions that have a bullet point by them! Steps to Buying a Home STEP 1: KNOW YOUR MONTHLY BUDGET NOTE: For this assignment, please do one of the following: a. For those that plan to work part time or not work outside the Home, you can use your household income for this activity. If you are single with no children right now, you will need to do this assignment based off the income your degree will earn you after graduation. b. For those that plan to work full time, you will be using the annual income from your desired career after you graduate. You can look up the average annual income for most jobs in the Occupational Outlook Handbook . While some households have two incomes, we have been encouraged to base our debt ratios on only one income so that should anything ever happen to the second income (death, divorce, or disability), we will be okay financially. For this reason, please only use the income from the career available to you with the degree you are studying. 1. Monthly Income : Carefully examine your monthly budget to determine how much you can afford to spend on housing. You will be using net monthly income (Net Monthly Income is the money you take home after taxes are taken out of your paycheck). Determine your net monthly income below by completing the steps below:  Career = 39,990.00 + 16,400.00 = 56,390.00  Annual Income = 56,390.00  Gross Monthly Income (Divide annual income by 12) = 4,700.00  Net Monthly Income (Multiply gross income by 67%) = 3,149.00 2. Housing Allowance : Many experts suggest not making your house payment more than 33% of your monthly take home pay. Dave Ramsey suggests not going over 25% by saying “I see so many people who can’t take a decent vacation or save anything for retirement or their kids’ college fund because their mortgage payment is through the roof. That’s called being “house poor.” And I’ve even seen it push people into debt just to buy groceries.” Bankrate.com says “ Be carefu l.. you don't have to make the maximum monthly payment that you qualify for”. Kathy Cummings, homeownership solutions and education executive for Bank of America. Says, "There were a lot of other economic factors going into it, but if you are maxing yourself out on your home, you can't absorb some of those impacts." ’ For the purpose of this course, you will stay in the range of 25% to 33% of your net monthly income that you identified in step 1 when you are buying a home. To calculate that percentage, multiply your net monthly income by either .25 or .33. Identify that range below: 1

 25% of your Net Monthly Income = 787.25  33% of your Net Monthly Income = 1039.17 3. Use this Monthly Budget Calculator as a guide/template to create a budget based on your career salary. Leave the mortgage information, insurance, taxes, maintenance and electric & gas information blank . Enter your current budget items for the remaining categories. Note: Although TV, cable or other amenities may be included in your rental contract now, you will not have that luxury when you own your own Home. You will need to add these things into your budget. It may require you to look up how much cable and internet cost. After entering this information into your budget, the number at the bottom of the budget shows you how much you have left in your budget for housing and other expenses.  Does it fit into the range you listed above (between 25-33%)? Yes  If you need to cut back, where will you be cutting expenses? Miscellaneous, such as gifts. Pay off credit card as fast as possible. Groceries, if possible. KEEP THIS SCREEN OPEN, YOU WILL ADD THE MORTGAGE, INSURANCE, TAXES, ETC. LATER IN THIS ASSIGNMENT STEP 2: PREQUALIFY FOR A LOAN 1. Our textbook advised us in chapter 4 to review our credit reports often within 12 months of buying a home. Visit Annual Credit Report and pull your credit report, if you haven’t already done it.  Are there any errors on your report? No  What information do you see on your report? (You do not need to list personal information, just general information) NOTE: You do not need to pull a credit score, just the free credit report. List of revolving accounts, car loan, personal information, employment history, and inquiries.  If you don’t have a credit report, please explain what that means and how you can safely start building credit. Or if you plan to take the Dave Ramsey 'no credit' approach when buying a home explain how you intend to be able to do so. 2. Visit How Much House Can You Afford . The number obtained in the calculator is the amount you are prequalified to borrow  How much are you prequalified to borrow? 28,568. 3. Next, determine the amount of a down payment you plan using. Select from the options below and explain how you would get the money for the down payment. 2

 Where is the money coming from for your down payment? (Selling of a current home (Home Equity), Savings, Selling current investments, or another way) If you are saving, what is your SMART goal for saving? Family  What is the dollar amount of the down payment = $10,000. 4. Please recap the following steps by answering the following questions  Annual Income = 56,390.  Down Payment = 10,000.  Monthly Debt Total (include student loans, tithing, auto loans, credit card debt) = 1510.  Prequalified Amount = 38,568 STEP 3: DETERMINE WHAT YOU ARE LOOKING FOR  How big do you want your Home? A small home to retire in, under 1000 sqare feet.  How many bedrooms and bathrooms would you like? At least 2 bedrooms, would prefer 3, and 1 bathroom.  What kind of neighborhood would you like to live in? A comfortable area, with similar type houses.  How near would you like to be to work, school, church, grocery stores, etc? Within 30 minutes, preferably the same town. STEP 4: REALTORS AND INSPECTORS  What makes a realtor a good realtor? How much can you expect to pay your realtor? What services does a realtor offer? Knowledge and Expertise , Communication Skills, Negotiation Skills, Problem-Solving, Attention to Detail , and Market Insights . The standard commission for a real estate transaction is typically 6% of the home’s sale price. Services Offered by Realtors: Buyer’s Agent Services : Helps you find the right house in the right neighborhood. Identifies red flags and assesses a home’s value. Negotiates on price and repairs. Seller’s Agent Services : Provides peace of mind during the selling process. Offers pre-listing advice to enhance property value. Analyzes market conditions and develops pricing strategies. Arranges professional photos, virtual tours, and home modeling.  What does an inspector do? Why is it important to hire a good inspector? Are they worth the cost? An inspector plays a crucial role in assessing the quality and safety of various items, structures, or processes. Quality Monitoring, Defect Inspection, and Cost Assessment. Importance of Hiring a Good Inspector is Peace of Mind, Negotiation Power, Safety Assurance, Long-Term Savings, Compliance, Cost Consideration. While hiring an inspector involves an upfront cost, it’s a worthwhile investment. The benefits of catching issues early and making informed decisions far outweigh the expense. STEP 5: LOOKING AT MANY DIFFERENT HOMES 1. Look at the MLS listings on Realtor.com or Zillow.com in your area or the area you want to live in. Do a search for homes in your prequalified price range from step 2 and answer the following questions. 3

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 How do you feel about the homes you can afford? Are you excited about them, or does this motivate you to save for a larger down payment thus allowing you to buy in a higher market? The only house in my price range is a mobile home. No, I am not excited. I don’t understand why it states that I am only qualified to borrow $10,000.00. Yes, I need to save more for a down payment, and anything else that I need to do.  Link to Home in your price range on MLS: $25,000.00 2. Now do a search for homes in your prequalified price range (search the same price range you used in the example above) in a different area and answer the following questions  How do you feel about the homes you can afford in this area? Are you excited about them, or does this motivate you to save for a larger down payment thus allowing you to buy in a higher market? There are a few more homes within my range. Some look really bad and need a lot of work. Yes, I need a larger down payment.  Link to Home in your price range on MLS : $42,000 3. Reflect on what you researched by answering the following questions  How do the two homes in the two locations you searched compare to each other? The mobile home looks really nice, but has a lot fee of $650.00 a month. The second home needs some TLC, but I have a son who is capable of doing the work, probably for free room.  Is there a difference in the amount of house you are able to afford in the different locations with your same budget? (size, location, acreage, amenities, etc). The first home is in a mobile home park with a very tiny lot. The second home is two story with three bedrooms with a ¼ of an acre. STEP 5: DETERMINE DOWN PAYMENT AND UP-FRONT COSTS Choose ONE of the two homes that you looked up on the MLS websites. 1. Shop for best interest rates for both a 15-year mortgage and a 30-year mortgage. Start with bankrate.com. Look at 2 other online or local financing options as well. Bankrate.com Interest rate:  15 Year = 6.55%  30 Year = 7.16% Financial Institution #1 [Chase]:  15 Year = 5.875%  30 Year = 6.5% Financial Institution #2 [PNC]: 4

 15 Year = 6.125%  30 Year = 7.0% 2. Using your pre-qualified loan amount and the interest rates you just found, use a mortgage calculator to determine your monthly payments based on a 15 or 30 year mortgage. Using 15 year bankrate interest  Monthly Payment = $373.00 Using 30 year bankrate interest  Monthly Payment = $310.00 Using 15 year rate from [Chase]  Monthly Payment = $361.00 Using 30 year rate from [Chase]  Monthly Payment = $296.00 Using 15 year rate from [PNC]  Monthly Payment = $366.00 Using 30 year rate from [PNC]  Monthly Payment = $306.00 3. Choose a mortgage. 30-year mortgages generally have lower monthly payments but higher interest rates, whereas a 15 year mortgage generally has a higher monthly payment but a lower interest rate. Explain why you chose the mortgage you chose. I would choose Chase, 15 year loan. With my future salary, I would be able to make the payments, and pay it off faster.  Are you choosing a 15 or 30 year mortgage? 15  What is the interest rate you are choosing? Why did you choose that mortgage? 5.875%, the lower interest rate, and a bank that I use.  Is the payment less than 33% of your net income? (If the answer is no, you will need to find a cheaper house or another mortgage) Yes 4. Down payment amount : Before you buy, remember that the down payment on a loan may be from 3 - 20 percent of the cost of the Home. Multiply the value of the homes you searched in the MLS by the percentages listed below. Calculate a down payment for the percentages listed below.  3% of home value = $1,260 .  10% of home value = $4,200.  20% of home value = $8,400. Why is 20% considered the “golden” down payment? It is a substantial enough amount of money that it's unlikely lenders would face uncompensated losses if they had to foreclose . If you can put 20% down, you can avoid being forced by a lender to pay for mortgage insurance that protects them . A 5

larger down payment can also be beneficial because a buyer's credit score, income level, and debt-to- income ratio help determine a loan's interest rate, borrowed amount, and terms of the mortgage . 5. Home owner’s Insurance : In addition to your monthly mortgage payment, there are other expenses associated with owning a home. Determine your estimated insurance. “According to the Federal Reserve Bureau, the average cost of an annual premium for homeowner’s insurance is between $300 and $1,000. For most homeowners, the annual costs for a homeowner’s insurance policy can be estimated by dividing the Home's value by 1,000, then multiplying the result by $3.50.” HomeGuides.com Divide that number by 12 to get your estimated monthly insurance payment.  Value of Home = 42,000.  Divided by 1000 = 42  Multiplied by $3.50 = 147.  Divided by 12 (monthly insurance payment) = 12.25 6. Property Taxes are another expense of owning a home. To find an estimate of what your monthytaxes would be, input your zip code and home value into the Smart Asset Property Tax calculator and divide by 12:  Monthly Property Taxes = (Annual Property Tax Estimate)/12 = $63.67 7. Determine estimated maintenance costs . Bankingmyway.com posted this advice on their website: “Obviously, there’s no way to forecast these costs for sure. But mortgage-data firm HSH Associates suggests homeowners assume they will come to about 1% of the property’s value — every year.” Multiply your home value by 1% to determine your estimated yearly maintenance costs. Divide that number by 12 to get your estimated monthly costs.  Monthly Maintenance Costs = $35.00 8. Determine your estimated utilities . The national average of energy use for utilities is 1,200kWh per month. Use the following formula to calculate your estimated monthly utility costs:  Average Monthly Utility Costs = Total Monthly kwh usage X .1299 = $159.26 9. Add another $60 for water and sewer.  Average Monthly Utility Costs + water and sewer = $107.66 10. Putting it all together: 6

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 Now, add the answers from numbers 5 to 9 and put them into the budget you created in Step 1. What is your total for your housing and utilities? $738.84  You will need to find a cheaper house if your housing and utilities are over half of your net (take home) pay.  If the total budget numbers exceed your total income, you will need to find a cheaper home or adjust flexible spending items in your budget to try to make it work.  You will need to have at least $50 in each category of the budget (if you don’t have children, you can leave that at $0).  Don’t forget, the book advises you to treat your tithing like a debt (so it gets paid each month). Make sure to add tithing into your “debts”.  Collapse all of the budget categories on the website and insert a screenshot of your budget here: [insert screenshot here] STEP 6: CONTACT THE SELLER 7

1. What questions are important to ask when buying a home? List three questions you would be sure to ask the seller when buying a home . What is the history of the home? Are there any issues with the neighborhood or community? What appliances and systems are included? 2. How much would you offer for the homes you found in the MLS sites? What criteria did you use for determining your offer ? In today’s market, to secure your chances, is to offer more than the home is worth. $43,000. STEP 7: NEGOTIATION 1. The seller may reject your offer and counteroffer with a higher price. What do you need to know about negotiating the price of a home? Since, I am offering more than the asking price, I am not open to negotiating. STEP 8: SIGN THE CONTRACT 1. Once the contract has been agreed upon, both parties (buyer and seller) sign it. You now make an earnest money deposit. What is earnest money? How much money would you offer in earnest money? Why? Earnest money is a deposit made by the buyer to demonstrate their good faith in purchasing a property. It serves as a commitment to proceed with the transaction. The earnest money deposit typically ranges from 1% to 3% of the sale price. STEP 9: REFLECT 1. Write summary describing your experience throughout this home buying activity. What did you learn? What was the most difficult part of the experience? It has been a few years since I have actually bought a home. A few years ago, I helped my son buy a home. I don’t remember having to take all of the steps that was needed in this assignment. His realtor helped with some of the steps. Home buying takes a lof time, research and homework. You have to be totally committed in following all of the steps. The most difficult part was taking all the time involved in the process and sticking with it. I think you need a lot of guidance with the professonals involved, and a lot of conversations with Heavenly Father. 8