Real Estate Affordability Reality Check: House Buying Guide | Liam Orton | Skillshare

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Real Estate Affordability Reality Check: House Buying Guide

teacher avatar Liam Orton

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Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

28 Lessons (3h 17m)
    • 1. New Home Course Intro Edited

    • 2. Home Buying Course Getting Started Buying Vs Renting

    • 3. Home Buying Course Buying Vs Building

    • 4. Home Buying Getting Started Balanced Approach

    • 5. Home Buying Getting Started Financial Checklist

    • 6. Home Buying Getting Started Functional Checklist

    • 7. Home Buying Getting Started Preferences Checklist

    • 8. Home Buying Getting Started Heart Investor

    • 9. Home Course Getting Started Financial Side of Home Purchase

    • 10. Home Course Getting Started Cost of Ownership

    • 11. Home Course Getting Started Managing Expenses

    • 12. Home Course Getting Started How Expensive of a Home Should You Buy

    • 13. Home Course 5 Factor Analysis Intro

    • 14. Home Course 5 Factor Analysis 2 Saving

    • 15. Home Course 5 Factor Analysis Financial Stability

    • 16. Home Course 5 Factor Analysis 3 Debt

    • 17. Home Buying 5 Factor Analysis 4 Credit Score

    • 18. Home Buying Credit Report

    • 19. Home Course 5 Factor Analysis Hard Work

    • 20. Home Course 5 Factor Analysis Prepaying Your Mortgage

    • 21. Home Course 5 Factor Analysis How to know if you're getting a good deal

    • 22. Home Course Section 5 Intro

    • 23. Home Course Section 5 Finance 2 Types of Loans

    • 24. Home Course Section 5 Finance Government Loans

    • 25. Home Course Section 5 Finance Conventional Loans

    • 26. Home Course Section 5 Finance Lender Comparison Chart

    • 27. Home Course Section 5 Finance Which Loan is Right for Me

    • 28. Home Course Section 5 Closing Disclosure

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About This Class

Through this course, you will understand:

  • The Key Factors that impact how much of a home you should buy
  • How to know where you're really at financially now
  • A Clear Framework for selecting a home that you can afford
  • An "All-In" Approach to factor in all major costs of buying and ownership
  • Easy to use resources to help you know where you're at - no need to reinvent the wheel¬†

Meet Your Teacher

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Liam Orton


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1. New Home Course Intro Edited: hello and welcome to another action based course. The focus of this course is how to know what you can afford, and it's empowering yourself to get it right the first time with your home purchase. So who is this course for? This course is for anyone who is in the process of searching for a home or plans to buy one in the future and wants to buy right the first time. It's for a course or anyone who is looking to understand what they can really afford. And it's a course for anyone who is concerned with the price of homes and knowing what makes sense for them without relying on agents incentivized to sell them the most expensive thing they can qualify for. So let's think about this for a minute. Your home loan officer, What is his or her incentive right? The more expensive of a mortgage they can get you with, Or they can assist you with right there helping you actually, um well, that's more interest payments for them, right? So they're incentivized to get you the highest mortgage. As per their internal risk guidelines, allow looks look at the real estate agent who you're gonna be working with defined properties, they make a commission from the sale again. They're going to be incentivized to sell you the most expensive home that you can qualify for financing for. So really, in terms of the different people that you're working with, their all or a lot of them are incentivized to get you into a home, which is the most expensive home that you can qualify for for financing. And that doesn't necessarily mean that it's the right home for you or that it's the home that makes sense for you financially, right? Um, and we'll go into that a bit more detail later on in the course. But it's important to understand that there's a big difference between what you could theoretically afford and what you can really afford, and to give you an example from this, I'm you know, sometimes I use the website nerdwallet dot com, and I think they have a lot of great content. But when I used their online calculator to tell me how much of a home I could afford, it was giving me a number which was pretty astronomical, and I ended up buying a home which was half actually less than half of the price of what they said I could quote unquote afford. Well, sure, I could have afforded that home if you know we didn't eat out ever or we didn't have any entertainment or we didn't have Internet Or, you know, all we ate was very simple food. But that's not what we want to do. And you don't want to be spending half of your paycheck after taxes or even before taxes on housing. That's just a ridiculous percentage to be at, you know. And so that's something that you really want to keep in mind. So in this course, some of the keys takeaways, they're going to be how to think about buying a home and important things you can do to make the process smoother and more effective. I'm gonna go through a five factor analysis to help you see what you can really afford, and then I'm gonna go through home financing in key terms and resource is. But I'd like to just dive into some of the content to give you a feel for what you're gonna be able to learn. I've created financial checklists for you. There really break down the different parts of understanding the cost of home ownership. Um, and it's going through the lump sum amount, which you're gonna be having to pay up front. So that's understanding what the purchase price is, how much of a down payment you're gonna make. And then you were closing. Costs are home inspection. It's such other costs. So you understand upfront how much you're going to need to be paying out of pocket. Then you're gonna understand the financing part and that ties into your credit score loan period loan amount. And I'm gonna go through and explain each and every element here to make sure that you have a strong understanding, so that when you're going out and shopping for loans, that you really have a good feel for what the right mix is for you and then understanding what the ongoing cost of home home ownership is. Um, because there's another element there that you need to understand, which is, you know, what is property taxes? What is private mortgage insurance, etcetera? I've another to live put together is a lender comparison sheet to help make it easy for you as you go out and compare different lenders. Everyone's gonna have a different format in terms of how they're giving you a price quotation. Whether it's an email or it's an attachment to an email or PdF or whatever it is, they all look a bit different. So I've created this so you could just input the information. And then it's easy for you to understand which lender is giving you the best rates. And it's not just about the interest rate. It's also about what the closing costs are. It's such as well, and so it's an easy way to compare that. I'm gonna go through a home buying timeline management checklist, which is really important because there's a lot of elements and a lot of moving parts here . And so when you have a tool like this, it just makes life a lot easier for you. Because, you know, it's easy to forget one or two things. And one of the really important things that is to remember is that when you sign the home purchase and sale agreement, there's gonna be a closing date, and that means that you have to have your loan in place. It means to have you have to have your home inspection done. You have to have any. Any issues that you would have brought up through the home inspection need to be have been communicated in writing and responded to. And so there's again a lot of moving parts, and so you. It just makes life a lot easier to have a check. Lists surgeons use them. Pilots used them. Let's make our lives a little bit easier and have a checklist here on, then just again preferences understanding. You know whether it's the overall look and feel exterior interior, you know, because when you've seen 357 10 different properties over a span of number of weeks, it's tough to remember specifically what you liked about each property and try and keep them in all in perspective over time. So this is just, you know, if you loved it, we're gonna give that to point. If it was good one point if it was just OK or so so it doesn't get any points, and if you disliked something, it's a minus one, and then if you really didn't like it, it's minus two, and so you fill these in, add them up you get sub totals for each column, and then you add those together and you get a grand total. And then when you're coming back again weeks later to try and figure out which properties you want toe create, put onto your short list. This will be helpful for you, so I love this quote. Success is where preparation and opportunity meat and the goal of my course is to focus on the preparation side so that you're in a great place so that when you're out and actively looking for a home that you're able to understand what you can afford. You've already looked at a number of properties and went a great buy comes along that you could jump on it and get it, and you'll be really happy. 2. Home Buying Course Getting Started Buying Vs Renting: Section one getting started. So let's talk about buying versus renting, right? So when does it make more sense to buy? So when you're planning on being in the area for the long term, you have a stable income. This is really key and have saved up enough for the down payment as well as an emergency fund. And your mortgage payments. And home maintenance costs are within 28% of your monthly gross income. So why 28%? 28% is a number that many lenders use and what they call your debt to income ratio. And this is what tells them how. How much of a home can you really afford? So I think this is a great place to start. Personally, I'll go into this more detail later, but I think 28% is a bit on the high side. If anything, um, it also makes more sense to buy when you can rent your home out for more than the cost of paying it back and maintaining it. So if you can buy a home for $800 a month in terms of your home principal and interest payments, plus your homeowners insurance as well as taxes. And you can go and rent out that same home for, let's say, 1100 or $1200 a month. You're gonna be able to net 3 $400 a month, and that's money in your pocket. Granted, there will be maintenance and other expenses above and beyond that. But you get the idea that you're able to make money off of it, and that's called positive gearing. And you want to stay away from negative gearing, which is what some people do when they're being in a more speculative mode. And they're just buying the home and looking and hoping that the market will go up and they can flip it in a number of years for a profit. I really don't recommend that. That's how a lot of people got into trouble during the financial crisis. So what does it make more sense to rent? Well, when you're just starting out in your career or your careers change, you've had a significant life event. Um, and you know, your income prospects or, you know, you're not sure where you're gonna be for a while If you're wanting to be moving between cities or wanting to travel. Um, when you don't have a stable job or enough income when you don't have enough savings to pay for a down payment, and when you're not ready to make a commitment to an area because it is a big commitment owning a home. And although most people don't stay in the home for the full length of their mortgage period, you are going to need to be there for a number of years. And remember, every time you move, there are significant costs associated with that. So some people are a little bit more visual. So I have done this in another way as a decision tree. So just really starting out here Do I have a stable income with growth and is it replaceable? And if the answer is no to that, they need to be focusing on your income growth while you can rent what you can afford because we don't want to overextend ourselves. But if the answer is yes to that, then we really like where we're at. Do you want to be here for the next 10 plus years? I think that's a good guideline horizon to be looking at when you're wanting to see how long you want to be in an area, because if you're looking at being anywhere less than that, it doesn't really make sense in my mind to commit, because while you could sell five years later, nobody really knows what the market's going to do. While long term trends show that it went up, you know that was not the case for 89 10 8011. So timing does play an element there, just like in the stock market. But so if you don't like the area that you're in, well, continue renting until you find a place that you do like or until your job settles down, or until you know you find a career path that's right for you or whatever that is. If you do like the area, then there's the whole affordability element. So can you afford to buy a home there because you may or may not have an income that's on track with what the cost of housing is there, and that's a serious issue that a lot of people face in more metropolitan areas, you know, are you in the Seattle area of the San Francisco area. The New York area affordability is a really issue for most people. So if you can't afford to buy ah, home there, then again you need to continue renting or move to an area that's more affordable. So that is why a lot of people rent for a number of years because they want to live in the big city. They want to be in New York or San Francisco, but then, if they're not able to make it work professionally, then it makes more sense. Toe move back joy you're from or to another area where it's more affordable and you still have decent employment options. If the answer is yes, then that there's still a lot more steps beyond this. But let's go ahead and start the buying process. So in terms of benefits of buying, you know, what are they? Well, you have. It's a long basically. Buying a home is a long term savings vehicle, and what I mean by that every month, instead of putting away putting money in somebody else's pocket, you're paying down the mortgage or the loan on your home and that builds what's called home equity. Home equity is the value in the home that's yours that you own. So the more that you paid towards that, the more of the home, which is yours at the end of the day, and then when you go to sell it, you get that much more money. So this is all money in the bank for you, as long as your home value is able to maintain, which is, you know, which is a significant question some people bought at the peak and their home values decreased a lot. And then they had mortgages, which were quote unquote underwater, where the value of the mortgage was greater than the home and a lot of people went through a lot of pain and suffering because of that. And that's that's where the whole affordability element comes in. Ah, and it's really important to understand where you're at in the home cycle. So again, next point stay, you can stay ahead of inflation. I'll show you in a minute. But typically, the price of homes have risen more than inflation has over the long term. It's an opportunity for significant increases in property values again property values have increased over the long term. You can rent it out and potentially gain income if you're able. If you've bought a home, which is oven affordable nature for the rental market, meaning that the mortgage payments as well as the homeowner's insurance and renter's insurance is one product and the taxes cost less than you can rent it out. You can save expenses on moving costs. Moving is expensive. Ah, it costs, you know, thousands of dollars every time you do it. So the less moving you can do, the more money in the bank is for you and then in retirement or later on in your life. You have cheaper housing costs after the loan is paid off. So rent is usually more expensive than taxes and insurance and maintenance. So this is what's one of the better out the payoffs of being in a home for the long term. Opposite Lee, though if we look at the benefits of renting well, you have a lot more mobility. You can move to another city or another area much more easily because you're only in a contract for usually a year, maybe two, and then at the same time. What is your downside? Well, your downside is the deposit you've paid, which is usually two months of rent. Well, your downside of leaving your home, which you've bought, is all of your down payment, which is going to be tense of thousands of dollars. So it's their very different numbers again. So you're only locked in for a fairly short period of time. There's no large out of pocket expenses for down payment, and it gives you a chance to know a new area or save up while you're preparing to buy. So this is, ah, quick graph I'd like to go through. So the case Schiller Home Price Index is an index of the national average in terms of home prices. So this is not the high end. It's not the low end, it's the middle. It's not a perfect measurement by any means, but it's the best tool that we have out there right now to give an idea of all right over the long term how our house prices in the U. S. Changing. And if you're listening from another country, I'm sure there's a similar index to measure the prices of homes again this is not perfect because one of the biggest reasons would be it. Very location, location, location in real estate. You know, depending on where you're at, this mayor may not track. So it's important to look at your local market and see how house prices have changed over time. You can usually get that information from realtors associations or from your local religious ER or from may be, ah local economic bureau or Chamber of Commerce, etcetera. Um, And then you can see how the consumer price index, which is another way of saying inflation has changed since over time, since when they started measuring this so you can see that it's increased Inflation increases gradually each year. And what happens if you're a renter is as inflation increases over time, it means that the value of money is decreasing over time. And so the people that own the homes are whenever they're able to, they're going to ask for higher rents. So when there's when it's a renter's, when it sorry, it's when it's not a renter's market per se. But when it's a market in which the landlords have more of an upper hand and there's a scarcity. In terms of rentals, you're going to typically see une easier environment for prices to increase. So this is where it's better to be a home owner. I was talking a little bit before about how long people have been staying in their homes, and this is us home ownership. 10 years, or how long do people stay in their homes before they sold? And we can see that this is all on its way up. Right? In 2016 it was 7.88 years. Again, this is average, and it's not that much time. But that being said, I think you should plan to stay in your home for at least 10 years. Otherwise, there's just, you know, it's tying up a lot of capital. It's very work intensive. There's a lot that goes into it. So I plan on being in your home at least for 10 years. If you're looking at buying 3. Home Buying Course Buying Vs Building: When does it make more sense to buy? Well, when you want to move into your new home within 12 months Because building often takes at least that long. The building process itself may not take that long, but looking at floor plans, finalizing floor plans, looking at different fixtures and fittings. And what sort of citing do you wanna have? What sort of basement do you wanna have? What sort of flooring do you wanna have? What sort of kitchen do you wanna have? Is a very long process just to decide on all of that. And then the construction process starts. So you're looking at easily a year and 1/2 if you're looking at buying, and then there's the other element of that is if you're buying with a spouse or a partner or family, etcetera. Sorry. If you're building with a spouse, a partner or a family, etcetera, there's so many decisions that have to be made that it can really be a nightmare to manage the whole process. So unless you're really sure that that's what you want to do, buying makes sense for a lot of people because you're able to go in and see. All right, Is this something I like? Yes or no, And you can just take it at face value, and you don't have to decide this or that because it's just a simple what do you being presented with so again when you don't want to deal with construction issues? Delays going over budget? Maybe you're not familiar with the construction industry and all of the dynamics that go along that, but delays air very common. Going over budget is very common, and having issues managing people is also very common. Um, not to say there aren't amazing crews out there that are able to do it under budget on time Ah, without any personnel issues. But that's more of the exception as opposed to the rule. And my dad was in construction for 30 plus years, So I feel like I can say that after talking with him and a number of other home buyers again, there are exceptions. It's not everyone but understand that it's a huge headache, and it's a huge process to manage. If that's not your forte. All right, when you found a house that you more or less like on hopefully more than less, you know, Go ahead and take it. You know, if it's at a good price, you could just buy it and move in. Ah, when you want to be in an area that doesn't have any open lots, You know, if you're not prepared to knock down a home and then build up from scratch, which most people aren't, you know, that's usually for the 1,000,000 plus cash buying category. Um, you know, you're looking for empty lots where you're looking at rare our land and on dealing with that. Also, you have city hookups or you're having to drill your own well, bring out power, bring out phone, bring out Internet, all of those things. So there's a lot more that goes into that as well on. And sometimes it's just cheaper to buy than it is to build, which seems kind of crazy. But it is because of inflation and the price of home materials increase again. This is a bit cyclical, but if you're in an environment where home price increases are increasing, we're home building. Material prices are increasing year on year. Excuse me, that what cost for cement five years ago or 10 years ago is not asthma is cheaper than it is today, or sighting is more expensive today than it was 10 years ago. Um, so obviously it's going to cost more to build in some situations, but it does make sense to build for some people. So if you have a specific vision of a home that you want that you can't find on the market , um, then you know, that's and you want to be true to your vision, then you're gonna need to build that When you have land that you want to utilize, which doesn't have a home on it, then, yeah, it makes sense. Tiu Tiu build when you live in an area that doesn't have housing, you know, maybe you are in a more rural area, then it makes more sense to build. Sometimes it is cheaper than buying. So that's why you really have to looking. Compare. Maybe the housing market is getting really expensive, and building is not quite caught up yet, so it might be cheaper for you to build them to buy. Just be sure you're also including the cost of temporary housing in that calculation, Um, and this is the big one. But if you have industry experience that helps you save costs or manage the process more effectively, it can definitely make more sense to build than to body. 4. Home Buying Getting Started Balanced Approach: so moving on, I'd like to talk about my balanced approach to home buying, and it's important to satisfy your objective criteria first and your subjective criteria Second. So what does that mean? What is objective criteria and what is subjective criteria? Well, objective criteria are criteria that are impersonal, its third person, these air fact based criteria that are based on rankings or scores or numbers, etcetera. And how are we going to get to that? Well, let's start with the financial one. So what is your debt to income ratio, Right. So how much debt do you have as opposed to your income, or what is your expenses in relation to your income? How expensive is the home relative to other homes in the area? What is your credit score? What would your interest expense be on that home? What mortgage type in period? Are you looking at these air? All things which preferences have a lot less to do with facts. On the other side, you have the functional side. So where do you want to be? You could argue that that's a preference based thing, but this is Ah, we're gonna select a general area here right. What size do you need? What number of bedrooms do you need? A home office. How maney carports do you need or how Maney garage, What size of garage do you need? So we're gonna create all of this through checklists, and then you're able to get through this a lot easier. Now, the preferences here is very subjective. You know, you're gonna look at something and you're gonna have an instinctual reaction to it. Do I like it? Do we like it or not? And it's a yes or no black or white thing. You know, it might be somewhere in between where I could take it or leave it. But this is the feeling you have in your gut or your heart. And it tells you this is a yes or no for me, you know, and things like, Does it feel like our home after walking through it? Can I see myself living here? Um, you know, do I like the ceiling height? Does it feel to small? Does it feel to big? Does it have enough? Natural light Doesn't have too much natural light, thes air, all really subjective things that you can't really put numbers against Not in an easy manner anyway. So this is just your yes or no things. So what I've done and what I suggest is that you build out your own checklists because really, only you know what your needs are. You're gonna be able to find a ton of different checklists online. I have some in my courses, well, but I have tried to build them from the perspective of and its ability malleability that you're able to adjust it as per your needs over time. To make life easier on yourself throughout the home search process by identifying upfront what your needs and preferences are. And after seeing you know, your fourth home, your fifth home, your 10th home, you may be adjusting that, you know, maybe you like more natural light now. Or maybe you like a home which is a bit in the more quieter neighborhood. Or, you know, the having families that are more similar to yourself. Near near you is more important to you now, after seeing some other areas. So again, three key checklists based on the balanced approach financial, you need to be able to afford it first functional, it should meet you and your family's needs and preferences and make comments on what you did and didn't like about the property. How did it feel? What would you want to change or have differently, because that will help influence or shape what you're looking for going forward. 5. Home Buying Getting Started Financial Checklist: is the financial checklist. So what we have going on here is, first of all, there's a lump sum purchase investment or lump sum purchase amount, whatever you wanna call it. And so what this is is we're going to look at What can I do today? And where could I be in 12 months? Because it's important to understand where you're at and where you could or where you want to be, because you may make more sense to wait or put off your home buying purchase while you're getting ready for another 12 months and you're going to be able to quantify how much of a benefit you'll be able to see view. See using this method. So if you have $15,000 in savings that you can put towards a down payment now, but you feel pretty confident that in 12 months this number could be $25,000 then we can see what the impact is on that and how much more of the home you could buy. So if we were going to buy a 20% down home, 20% down means that it's 20% down payment so set you would only be able to buy a $75,000 homes. I don't know a lot of areas where you could buy a $75,000 home. Um, maybe they're out there, but, you know, so you're really not going to be able to do much with $15,000 a 20% down. So what about 10% down? And understand that there's a range of down payments anywhere from no down payment on a V a loan, which is for active service members in the military and veterans to three or 3.5% 5% and anywhere up from there. So there's a number of percentage range ranges that are available in terms of down payment . But there's also a cost associated with paying less down because you're going to be having higher interest expenses over the cost of the loan, because interest is going to be accruing or building up on the amount which you're not paying down. So if we did 10% down, we could buy 100 and $50,000 house, and if we did only 5% down, we could buy a $300,000 house so you can really see how much of a difference that is by how much percentage you pay down, going from $75,000 to $300,000 home. Now, if we look on the other side in 12 months from now with our $25,000 down payment, which is not all of your saving, I just want to make that very clear. This is an amount you've set aside for down payment, and you should still have an emergency fund above and beyond this. But if you waited a year well, now you could buy $125,000 home for 20% down or a 10% down. You could buy $250,000 home or 20% at 5% down. Excuse me. You could buy a $500,000 home, and then we need to look at what is the closing cost? I've taken the middle example here at around 1.5%. Your closing costs will vary state by state and also depends lender to lender. But I think 1.5% is a reasonable middle range number here. So you're looking at about 2200 and $50 on today, under $150,000 home and $3750 um, on a $250,000 home. And then I'm adding in a home inspection here of $500 again, this would vary by area, but what you're gonna need to understand from this is that your total upfront cash outlay to buy the home, which is excluding repairs, furnishing and earnest money in earnest. Money is a real thing that you need, which can vary, but it's usually around 1 to 2% maybe even a little bit higher, depending on the situation of the home value. And so what I can do. So you would need to have $17,750 actually a bit more than this in pocket that you could put towards your down payment in terms of buying the home, Um, and while in terms of up front expenses towards buying the buying your home, and if you waited 12 months and went with the $250,000 home, you would need almost $30,000 in cash savings at a minimum. Okay, so I hope that was clear for people. Um, you know, Please go through it again. I'm going to go through a little bit more of an example here in a minute with using real numbers. So I hope this is helpful in terms of understanding. So just to summarize quickly, what amount of down payment can you put towards your home? And I'm gonna go into that in more detail later on. In terms of what is more affordable on what makes sense and what's prudent and realistic. You can then reverse calculate what you would be able to pay for a home. And that's a simple calculation where you just take the amount that you have and then divide it by the percentage and then your closing costs. Based on the home that you're looking at buying home price, you're looking at buying and then putting in a home inspection fee. So the next section is for your financing info. So this is where you need to find out what your credit score is, and you can do this a number of ways. I'll go into this in more detail later, but creditkarma is a great free resource. But to get a more accurate number, what you can do is get a free credit report on. I'll talk about that in more detail later, and you can go through that and see where you're at. And that's a great starting point because there's a huge impact on the cost of your loan based on what your credit score is or whether able you're even able to qualify for a loan or not in the first place. So, again, I'm going to spend a lot of time on that later on in this course. But please understand up front that it's a very important piece of the overall puzzle and then loan period. There's a number of different loan periods, but the typical one is 15 years or 30 years on a conventional loan. So if we look at the alone amount again using our middle example here, so if I take $150,000 I subtract my down payment, it's giving me $135,000. And then again, this is where you're going to need to shop around, but figure out based on what your credit score is and your income, what interest rate are you going to be getting? So you'll need to shop around and get a real number for this. But I've taken a reasonable number here for a 30 year loan. Um, currently, interest rates can change over time, obviously, but at 4.5% so at 4.5% you're gonna have a housing payment of $684. And how do I get to this number through an amortization calculator? Or you can do it with online calculators as well. I personally prefer using the amateur ization table, which I haven't excel, which you can download from a number of resource is online. I'm also going to give you one, and it's great because you can just plug in information such as the home value, the loan amount, um, the interest rate etcetera. And it'll it'll tell you what sort of numbers you're looking at. So basically here, then you need to understand. Well, what is the amount that I would need to pay on a monthly basis? And if we look at this or in 12 months from now, well, you could work on improving your credit score, so you're gonna have a better credit score. You have a loan period of 30 years again. Middle example. Hopefully, you would have been able to get your interest rate down. I'll talk again on that in more detail, but let's just assume that you weren't able Teoh Um, interest rates just to talk on that. For a moment. There, they're broken down into usually five or six different brackets, Um, but just because it's in a different bracket doesn't necessarily mean the bank is going to associate a different interest rate with that bracket. So if your interest rate is 6 80 you could potentially be in the same bracket is 7 20 That's a case by case scenario that you can again. I'll go into more detail, but understand that it's good. That's why it's important to talk with lenders to see. Well, if I'm at 6 80 today, if I got 2 700 wouldn't main. It wouldn't mean a difference in interest rate when I get an interest rate break or if I got 27 20 how much of an interest rate break would I be able to get to, And then we really have to look at what is the ongoing cost of ownership. So if we look at a conservative payment at 20% of your, uh, let's say you have an $80,000 household income that equates to $101,333. So what is 20%? 20% is This is just saying, if you made $80,000 a year and you paid 20% on a monthly basis, this is what it's gonna look like. If you made $80,000 a year and you paid 24% of your income to housing, this is what it would look like. $1600 if you paid 28% which is the maximum usually suggested on your income. This is how much you could pay. And then let's look and see. Well, you're probably renting right now, So if you're renting, what am I currently paying in rent? And I'm just putting in, you know, dummy numbers or sample numbers here, but it will be important for you to put in actual numbers for all of this, and I'll have the worksheets available for you so you can see where you come out. So then we'll see. What is the cost of homeowners in insurance again? Taking our middle example. This is again where it's good to get quotes, but I'll go into this more later. There's a basic calculation you can use to guesstimate this, um, your costs of property taxes again. It depends on the state and area you live in, but 1% is, you know, a number that I have used as kind of a middle of road number here, depending on your state in the area you live in, you can figure that out and you'll be able to see what that would be and then private mortgage insurance. So because we're not paying 20% down, this is a paint mint that we're going after making on a month to month basis, and what it is is that it basically insures the lender against your default. So if I compare the monthly cost of home ownership, excluding home and repairs, it's $1845 the difference in renting versus buying it means it's $45 cheaper a month to rent. In this example in the 12 months from now, the total cost of home ownership is $1975 which is $175 more expensive than it would be to rent. So let's look at what that is. So this is the same information. But now I've put in three potential properties or homes which were looking at, and this is how we're going to use this is now. We have an actual example. So over here, these to what I can do today and where I could be in 12 months is hypothetical. It's saying, What can I afford based on my income and situation? And now we're looking at properties and saying, All right, well, this is what it would cost to buy this. And then we're gonna compare these two. So this home number one at fictitious address 123 Park Avenue costs $250,000 a year, and the down payment is going to be if we take $15,000 which is where we're at today, right? What percentage of a down payment is that? Well, it's 6%. You should be able to get a loan at 6%. So, theoretically, you could probably buy this. If we look at 456 Main boulevard, the home cost is $300,000. Again, we only have $15,000 that we can allocate towards down payment. And so that's going to be a 5% down payment. And then we have our last property 789 anywhere, which is $175,000 with our same $15,000. And now this is an 8.6% down payment. So if we calculate the closing costs at 1.5% of the purchase price, if you're looking at 1 $3750 here, $4500 here in $2625 here, we'd pretty much have the same home inspection fee across. It will vary by area again and size of home, etcetera. So this is something where you're gonna need to get an actual quotation for. And so this tells us today if we wanted to buy any of these properties, how much money would we need up front? Um, so $269,000.20,000 dollars and $18,125. If I take our current credit score of 6 80 say it's a 30 year loan and we look at the loan amount, which is your purchase price minus your down payment, and we take the same interest rate at 4.5%. This is what your housing payment is going to be now, above and beyond that, You're also going to have to look at what is your cost of homeowners insurance? What is your property taxes and your private mortgage insurance? And so that's gonna tell you your total cost. So your monthly cost of home ownership again excluding repairs and maintenance, is $1,683,000 for 123 Park Avenue, 2000 and $38 for 456 Main Boulevard and $1152 by 789 anywhere. And so if we compare this to what are currently current rent is, we can see that the example on 123 Park Avenue and 79 anywhere is going to be cheaper than our current rent. So in terms of financial viability. Which one makes the most sense financially? Obviously, it's going to be 789 anywhere then 123 park and lastly, 456 main boulevard. But it looks like if you're going to be paying significantly more than your rent, you might be overextending yourself a bit. Unless you've been staying in the rented home for much longer than you could afford or a well, um, saying that you could afford you could have afforded to move much earlier. So I hope that makes sense for people again, we're going to be looking at How much money are we going to have to spend upfront to get this home? And do we have enough savings to cover that? We're gonna be looking at? What is the housing payment on a monthly basis? And then we're gonna be looking at what are ongoing. Costs are so we have a total monthly cost of ownership, and then we're going to see how does this compare with what we're paying right now and rent , and also what we can afford in terms of our income 6. Home Buying Getting Started Functional Checklist: Okay, I'd like to move on to the next check list, and this is again really something for you, too. Customize and edit as makes sense for you. But what I've done here is that I've listed out a number of different features on a home from car garaged, air conditioning, heating or type of heating. Whether it has a view how minute, many minute drive to parks it is. If that's what's important for you. How many minute drive to supermarket? How many minute drive to work out a minute drive to school? Because the time you spend in commute is lost hours. Basically, for most people in your life. And so, typically, most people like to have shorter commute times. If that's not as big of an issue for you, you can have a much longer number in here or larger number in here. You know? What kind of flooring are you wanting to have? Um, you know, do you want to have an open floor plan? Do you want a family room? Home office? How many bedrooms do you want? 12345 etcetera. Do you need a fireplace? A small yard, a large yard a fenced yard, a basement, patio or deck. Do you need lots of storage space? Do you want a south facing bedroom? Do you want garden space or a beautiful existing garden? Do you need a workshop or walk in closet? And then, you know, Please edit and mix this up and and change it so that it makes sense for you. This is really just a starting point. And, you know, as you look at more and more homes, you'll be able to refine this. So please work on this and you have version one version to version three overtime so that it's closer and closer to what you really want and what makes the most sense for your where you're at. And I would say, Don't just consider where you're at today. Look out three years. Look out five years from now because if we're talking about a minimum 10 year home ownership, then you want to be sure that the home that you're moving into is making sense for you, where you're at in that life stage a number of years from now. So if you don't have Children now, you be good to consider whether that whole would be suitable for Children or not. Or if you have young Children would be good to consider if it would be suitable for Children that are a little bit older. So these are all things to keep in mind. And then what we're gonna do is we're gonna have a must have nice toe, have and don't need. So once you've put in your different criteria, I want you to put a check mark or a zero or an ex or something so that you know that which ones are the must haves and which ones are the nice to haves, and this is gonna be our full list. So we're gonna have everything here and then based on that. And this is why I recommend doing it on your computer because it's a bit easier to change this leader. But then we're gonna have a short list. And what the short lift list is that now we only have our must haves and are nice tohave so you can see this is a much shorter list. And this is saying all right, these are things which we must have and which would be nice to have and things that we don't really care about that much, even though they were on the first list. Well, let's just focus on our short list. So it's good to start with a longer list just so that you have everything in mind. But then you can move on to a short list once you've already itemized and laid all of that out. 7. Home Buying Getting Started Preferences Checklist: Okay, Next one is our preferences checklist. So these are things which are more of an emotional, you know, feeling based thing. And hopefully, you know, you and your partner or yourself or you and your spouse or, you know, whoever it is you're buying the home with, or if you're buying it by yourself, then it's a lot easier. But, you know, this is where you really need to come on the same page and make sure that you agree and feel the same way because you don't want to have conflict around that later on. So things like what is the overall look and feel. The exterior appearance and condition into your appearance and condition. Quality and condition of appliances, quality and condition of fixtures. Kitchen size and layout. Bedroom size, garage size, distance to school, distance to shopping distance, toe work, distance to parks, access to public transportation. Safety in daytime noise levels, night time noise levels, traffic congestion, yard size, landscaping, feel of neighborhood. So things which were, you know, kind of a bit more difficult to put a number to, um, the distance part. Obviously, you can put numbers to that, but again, it's kind of how you feel about it as well. So I put it here a swell. Um, but we loved it or it's good, you know, it's solid. It's good. It's OK, you know, take it or leave it. So So, no, we didn't like it. We disliked it. And then we really disliked it, you know? And so you're going to use this. Excuse me on each home that you, you've you So you're gonna write in the address here, and then you're gonna bring this with you in a printed off or have it on a tablet or whatever, but I recommend printing it off because it's a bit easier, and then you're going to go through and you're going to mark all of these things and you're also gonna market against your functional checklist as well. And see, did it have your must haves due to have your nice to have so print off your checklist, your functional checklist as well as your preferences checklist? And then what I also recommend doing is putting numbers to it. And I put numbers to it because then it's a lot easier to come up with a score at the end now thes could have a different waiting and you could do awaited list as well and say that you know, we're gonna give overall look and feel has a higher weight than exterior appearance and condition. So if you want to be a little bit more precise about it, you can do it that way. But I think for most people just saying, yeah, we loved it in, you know, is enough and saying that OK, yeah, well, this was good and that we really didn't like that. So I have to positive two, for he loved it. Positive one for good. Okay, is zero because it's take it or leave it. Disliked is a negative one. Really disliked as a negative, too. And so what you'll do is you'll add up all of these that are relevant for that property. If it's not relevant, you can just put in a or put a line through it or whatever. So you know, too, that you didn't forget it, but that it it wasn't on that property, and then you have a sub total, and then we'll have a grand total for this for each property. And again, this isn't an absolute method. But believe me, you know, after you've seen 10 different properties over, you know, 10 weeks because you're only able to see them on the weekend, you know, because you're going to work Monday to Friday. Well, it could be pretty tough to remember exactly what you liked about property number three and why you liked it and how you felt about it. So this is really to help out your memory and to give you a reference and, you know, to understand that we're probably you're probably gonna be looking at a large number of properties over a long time, because, heck, this is a really important decision, and there's a lot that goes into it. 8. Home Buying Getting Started Heart Investor: When you find a home that resonates with you, you'll know it. You know, you, it'll feel great. It'll feel right, and these are things which numbers won't tell you. But it will tell you if you can afford that home or not, right, because sometimes you'll look at a home which your, you know, it's kind of a bit out of your budget or is a stretch, and it might feel great. Heck, I've been there. I've looked at homes which are amazing, right? But that might not be where you're at right now in life, you know? So it's you need to start with what makes sense for where you're at and find what is a good feel for you there. And so at the end of the day, you know you're gonna be spending a lot of time in your home, so it needs to feel right. Okay, so now that we're past the hard part, you know, that's that's what's most important now for some people. They want to get a financial gain out of their home, and again, I'm going to their house. So these are a couple things to think about. If that's you you know, if that fits the description for you and you want to make sure that you're buying at one number and you're selling at a number, which is higher than that. So a couple things to consider is Could I rent this home out later if I needed to move for work or we decided to upgrade? So what is the level of demand for similar rental homes in that area? You know that Something you can do some homework on and figure out whether you're looking on Craigslist or you're looking in the classified section or you're looking on an online group. Um, there's a number of different ways you can find that out. Uh, what is the average rental price range again? If you go to an agency which introduces homes to you, then you can see all right for homes that air this size in this area. This number of bedrooms, etcetera. What do they rent for? Ah, what is the cost of renters home insurance? Um, you know you can experience a significant increase in your insurance costs if you move from a normal homeowners insurance to a renter's home insurance. That's a conversation that's worth having with a home owner's insurance representative or a broker, or or somebody that's, you know that's experienced and can give you a good idea about that. But I would personally, I would just get a quotation, you know, and then you can see and hopefully get a quotation from two or three companies where you talk to an agent who can give you a quotation from a couple of companies. And that way you really know where you're at. And then how much should I budget for home repairs? This is where it's good to talk to experience people in the in your area, because where and tear varies significantly by area to area, you know how much natural damage are you having versus how much renter based damage are you having, because you have to consider the elements and nature's role in all of this as well. And then is the value of the home likely to appreciate over time? So there sings. There's a macro trend related to this, and then there's a micro trend relieved to this, so I'll start with the micro, which is meat, you know, What can I do or what could I pay somebody to dio, but basically what can be done to improve the value of the property? You know, the typical example of this is the fixer upper right, And most people probably don't want to move into a quote unquote fixer upper, But you may be moving into a home that could have certain improvements done on it. And if you're looking at it over a 10 year period, you could say, All right, well, I could improve the landscaping. Or I could put in double planed glass windows. Or I could improve the energy efficiency of the home in other ways. Or I could change the floor layout slightly, so that's a bit more open. Um, you know, etcetera, etcetera. So that's something that you can look at. And if you're not really familiar with that, you can always talk to someone who is. That might be a real estate agent. That might be a someone who does interior design. That might be somebody that flips homes for a living. That might be somebody that is a builder. So there there's a number of different resource is you can reach out to them and then you know is this neighborhood on its way up or down, you know, are people working to improve their homes? Um, you know, are you seeing a lot of people leaving the area and homes that air going vacant for long periods of time? Um, you know, our businesses opening up around the area or businesses closing down around the area. Um, do you have a lot of vacant commercial real estate around the area, you know, So there's a number of ways to look at it. And then I also think, you know, just talking with neighbors, you know, walking around and getting the, you know, the view from the perspective from the ground and see, you know, ask people, you know, how is this neighborhood compared to five years ago compared to 10 years ago, you know, and you might find some interesting things out that way. Another thing you can look at is who are some of the major employers in the area. How is their business doing? You know, how is their outlook? You know, if you hear a lot about layoffs from the major employers in the area, maybe the outlook isn't so good or you hear about large scale outsourcing. Maybe the outlook isn't so good. On the flip side, if you hear new record growth or you know that they're building another building, you know it Centra, Then that that tells you a bit of a different story. Um, is the home in high demand is a high demand neighborhood. So in the one way of looking at this is what is the average number of days on market for homes in this area. So if homes are on the market for a much longer period of time, it tells you that it's a low demand area. At that point in time, Um, again another one is the local population growing or shrinking? This is this is really a macro trend thing, so and you can get that information from a number of resource is. But you could go to you know, your city department and ask them planning and zoning would probably have an idea where census would have an idea. You could probably google it and, you know, figure it out that way as well. It may be more difficult to understand if you're not living in a large area, what the rate of growth is. But if you compare three years or five years or 10 years before and see how much larger the area is, that it will tell you something, and it's sometimes helpful to look not just for the the town or city. But look for the county as well because, you know, it might be out people might be building outside of city limits, but they're still within the county, so you might miss something. If you look at only the city population versus the county or general area population, and then what kind of people are moving in? Retirees, young professionals, families? Why is that important? Because people have different needs and wants and preferences, and so you're gonna want to be able to tailor to other people's needs, wants and preferences. But again, first and foremost, this is your home. This is where you're going to be living, and so it's important that you like it first. But if you're comparing three different properties which you like and there's one which you know could rent out for a higher amount, or there's one which you could do more to improve and you could do that in a cost effective way, it may make more sense to go with one, which would probably have a higher value over time. Again, it's not guaranteed, but nothing is. 9. Home Course Getting Started Financial Side of Home Purchase: in terms of the financial side of the homework, the home purchase prep work. So these are the steps that need to go through. You need to understand what you can afford to pay monthly for earnest money and as a down payment, you need to know what your credit score is and work on improving. Because unless you already have a really high credit score, it's just in your benefit to have a higher credit score, because you're gonna have, AH, lower interest expense. And that's money, which you can easily save. Um, it's it's good to consult in advance with government agencies to see if you qualify for guaranteed loans. I'll talk on this more later. Um, you can shot for loans and get pre approved to know the current interest rate is so. Know what the interest rate is for your current credit score and for your higher target create score. So if you remember, we had a 12 month from now where I could be on my financial checklist. Well, let's figure out what that looks like, you know, because depending on the credit score lender by lender, they have different equation in terms of what they charge for their interest rates. So if you're looking at going through, ah, large lender or, you know, anyone really just you could get quotations, but see, all right, if I moved from 6 52 a 700 How much is that going to save me in terms of an interest rate, and then shop around for your title costs. Just contact two or three reputable agencies in your area and find out what costs they have and see if you can negotiate any of them. Some companies may be more open to that or not, or they might be very rigid and fixed on it. But at least you know what? You're what you're working with. And if you can't make a 20% down payment, you're gonna have to start shopping for private mortgage insurance. 10. Home Course Getting Started Cost of Ownership: just in terms of understanding the cost of ownership just to review on that. So you have purchased cost, which is your purchase price, which is your earnest money and down payment. Sometimes you can use your earnest money to reduce the amount of down payment, and then you have your closing costs, which your bank or lender government and third party fees and then your ongoing costs. So things like homeowners insurance, private mortgage insurance, interest expense, property taxes, home repairs and maintenance, home reproach, home improvements and then homeowners association dues. And in terms of purchase costs the purchase price, you're able to influence this by shopping around and negotiating. I was able to do this, but I'm as well. But the you know, it's really just looking at a large number of homes and seeing which one makes the most sense for you. And then in this, you're gonna have again your earnest money and your down payment. Now your closing costs you can influence. This is well by shopping around Now on, when you get further along in the process, you'll see in the formal estimates that there's costs which you can shop around for, and what costs, which you cannot shop around for. But this is a little bit misleading because different lenders have different loan origination fees where the fee that they charge you two issued alone, they charged different amounts for credit reports. They charged different amounts for floods, things like floods, certification that you have to get or for the appraisal. I've seen a huge difference in the cost of appraisals of more than $100. Um so know that it's it's worth getting into the fine print detail and seeing what are the fees which are associated with the loan. And it's generally 1 to 2% of the purchase price. But heck, 1% or while half a percent on a two or $300,000 home is nothing to sniff at. So in terms of your ongoing costs, interest expense, you can influence this by working to raise your credit score and paying more down private mortgage insurance. You can eliminate this by paying 20% down or more, and you can also influence by working to raise your credit score paying mawr. Don't more down and pre paying your mortgage as much as you can because this goes away once you reach 20% home equity. So if you paid 10% down, it would go away much faster than if you only paid 5% down. Because you will get to your 20% debt home equity much quicker if you're working from a base of 10% than from 5% now for home insurance, you can influence this by shopping around and the general rule. In terms of calculation, I said I'd give you, ah, basic idea of how to calculate this and this is it it. So it's divide your home value by 1000 and then multiply by $3.5. Now, for me, in my situation, it was more like $2.5. But it'll depend on a lot of different factors in terms of when your home was built, how it was built, what materials were used, what neighborhood it's in, what general area it's in, etcetera. So you really need to get a quote on this. But that's a bit later on. In the process, when you actually have homes which you're seriously considered considering to purchase, I just want you to be aware of these or what some of the ongoing costs are and give you a general rule of thumb to get a quick calculation to see how affordable is it for you to buy a home that you're looking at? Um, there's there's really a lot that goes into this quotation form, Um, and so I recommend that you even before you actually go ahead and get really serious, I would just go ahead and look online at a couple of the forms. It's easy to do so that you can familiarize yourself with the kind of information that they require because it's really detailed and, you know, unless you ask the seller and I would recommend doing it, you know, in the early stages of after you've already had your offer in and it's accepted. But you're gonna want to know all of these very marginal level details of what type of citing do you have? What type of flooring do you have? What type of basement do you have? You know, because for me, it's it wasn't something that was obvious. It was something that I had to ask the seller quite a bit, and it would have probably been easier to get responses from them if I'd asked earlier on in the process rather than later on in the process. Okay, property taxes. Um, you have to pay this on time, obviously. And it's important to give a change of notice of ownership to your county or whatever body monitors that for the area that you're living in. And the reason it's important, because if this is a rental property for the seller, they're going to be paying Maurin taxes than if it's your primary residence. And for you, I'm assuming it's going to be your primary residence. And so you would have a change of status in tax, and so that will save you a significant amount of money. But it's something that you need to get on quickly because just because all of the paperwork went through, typically, the the county tax department doesn't get that information automatically. It may be different depending on where you're living, but in my situation, I had to go and physically show up at the office, give them a number of different forms and inform them that I had purchased the property and so this is something you don't need to worry about at this stage. But when you're in the closing process and you're going into closing and signing, you know, hopefully your agent or the title agent should walk you through that. If they don't, though, I know that it's something that you need to do and you need to do quickly. Um, home repairs and maintenance one. You know, rule of thumb, which I found is 1% Um, that, you know, may or may not be accurate. It'll depend again on where you're living. What? You know what condition your home is in when you bought it, what materials it was made with. But just know that it's something you need to account for, and then home improvements and Home Owners Association dues. So you might be wondering how high property taxes are in your state. Well, this is a infographic that gives you a pretty quick idea. So you can we use 1% and you can see that for places like Washington or Oregon, that's quite accurate. But in if you're in Texas, severe in Illinois or you're in Wyoming, Um, you know the numbers we're gonna very significantly there 11. Home Course Getting Started Managing Expenses: This is where we start looking at the affordability of the home and figuring out where you're at. So what do you know? What can I afford with the income? My half. So you need to understand where you're spending money. Figure out where you can cut costs and determine a maximum monthly housing payment that you're comfortable with. So we started on doing that on the financial worksheets, and this is going into it in a little bit more detail. So in terms of tracking household expenses, because, believe it or not, most people don't really know where they're spending money every month. So it's good if you haven't already done this to do it for at least one month, preferably for two or three, and be very detailed and meticulous about it. And again, it's only for a couple of months. But you need to understand where your money is going out, and based on that, that information is going to be power for you later on. So, for a minimum of one month, ideally much longer, keep a record of every single thing that you spend money on. The way that I did this was I just had a notebook, did it very low tech. And every time I spent money on something online or offline, I had a confirmation or a receipt of some sort, which I kept in my wallet. And then at the end of each and every day, I recorded those down. It's a lot more painful to have to do a lot, so little by little makes it a lot easier. So at the month end, add up the totals for each group. So groceries. Where did you spend on groceries over the month? Rent, electricity, gas, eating out car payments, phone, Internet, etcetera and then a sign, a percentage of the total that you spent two each group and see where you're at and just, you know, do a gut check. Does that seem representative of how you usually spend your money if not try for another month or longer to get a better feel for how you actually do so? That's why I say you no idea if you can do this for three months or more. Even better, because you're gonna have some expenses, which are one time or you pay on an annual basis. Some people pay their insurance on an annual basis to get a discount, for example. Well, you're gonna want account for that in your monthly expenses, etcetera. Um, I also recommends splitting your expenses into two categories, like a business, fixed expenses and variable expenses, and it makes it easier to see where you could cut costs. So fixed expenses are the same every month, like your rent or your cable subscription or your Internet subscription and variable expenses change every month, like your food bill. So based on this, you could see what you could currently afford to pay for housing and make sure that you're keeping some money for savings. So if you really want to have a nicer home with your current income level, that means that you will need to sacrifice elsewhere. And most likely, the easiest place to cut is typically where you eat and drink. So if you can recall our example before we did, we're right now in 12 months from now. Well, if your income is the same one year or more or less the same one year from now, as it was before then, where you going to be able to cut out costs well again, it's going to most likely in your food and drink. So if you needed an extra $200 a month for, ah, nicer housing payment, so then you're gonna have to eat and drink $200 amount less every month, right? Because you have the same amount of money. So what I recommend doing is actually going out and saving that additional $200 a month. Don't just leave it as a mental exercise. Go out, do it. Cut out $200 from your eating budget and do that for 1 to 3 months and see. Is that something that really hurts you, you know, is that painful for you? Is that something that you cannot stand? And then you'll get an idea of if it's a big deal for you or not. If it isn't a big deal for your not great, you just found $200 that you could save more every month. If it's not and it is really painful for you, well, then that means that you're probably not gonna wanna put an additional $200 on your budget So easy ways to track expenses. So there's traditional ways like I used. You can use a notebook in every evening. Write down a list of all of the things you spent money on, and you need to include your automated payments, online purchases, etcetera. Some people use an envelope method where they split up their monthly income into different envelopes and manage their expenses that way. Or you could do a little bit more tech enabled, and you can use a note function on your phone So you really noted down just when you spend the money or you can put it in an Excel or Google spreadsheet, and then there's also another. There's a number of apse which are dedicated to helping you do this so you have Bill Guard or Dollar Bird or fudge it or good budget. It's a There's a lot of tools out there. Find what works for you, find what you could be consistent with and do each and every day in day out, and it doesn't take up a lot of time and effort for you and just stick with that 12. Home Course Getting Started How Expensive of a Home Should You Buy: so there's a couple different evaluation methods, so as much as possible, as little as possible, somewhere in between match or pay less than what you pay in rent and then an income approach. And so if we look at what the deciding factor of the mindset is, as much as possible is really about well, what will the bank let me dio What are they going to approve? And I'm wanting to have the best standard of living that I can possibly afford and even more than I can afford. You know, it's about keeping up with the Joneses or getting ahead of the Joneses, and you're having a much higher risk tolerance. And you really have a strong, optimistic view of your future earning potential and how that's going to grow over time. As little as possible is the opposite of that. It's Can you stand living there? You know, this is the cheapest place that you could find that you could stand living there, and so it's It's really a low risk tolerance. It's saying that you know, it's a prioritization where you're saying that housing is not really important for me. It's a basic necessity, which I want to make sure that I cover. But you know, I'm not looking for any luxuries here. I'm just looking Teoh. Spend the minimum amount so I can spend my money elsewhere, whether that's travel or on a hobby or entertainment or whatever that is. And so somewhere in between is where most people fall where you find something that you like. It's not amazing. Maybe, you know, but it's nice. It's good. You know, it's something that you like. And so it's It's more of a practical mindset and you're doing more of a balanced approach. And this is This is where I let you know came in was that I found something that I felt was a good bye for the size and quality and location, etcetera. Um, and it wasn't really expensive. It wasn't. I could have, you know, bought something that was a lot more expensive. And I didn't I could have found something cheaper, um, as well. But I wanted to have something. Where because this is my home, not just a house. It's important to me that my family and I feel good there. And so we picked the middle road there. Okay, the next one is match or pay less than your rent. So this is really where you're just looking at what you're paying and rent right now and then bank approval and maintaining or slightly improving your current standard of living. If you can do more than that in terms of improving your standard of living, good for you, you know that's that's great. You know, High five and then income approach is looking at What is your potential income or R A. Y of the property. Our allies return on investment. So this is your investor mindset. So you're saying all right, well, my monthly payment and interest is going to be this amount, and my renter's insurance is this is my property taxes, this amount and I want a budget this much for repairs and maintenance, etcetera. And that total cost on a monthly basis is this amount. And the average rent for that area is this amount. And I'm able to make 1234 $500 or a certain percentage on my money doing that. Heck, yeah. You know, that makes a lot of sense to me. If I needed to move, then I could, you know, do that as well? And this is something for us personally. I also looked at because I think it is important. Nobody knows where life is going to take you. You know, nobody has a crystal ball. So I wanted to have a property that I could rent out and cover my expenses. And so it looks like that's the situation that I'm in. And so I feel a lot more confident in my home purchase because I know worst case scenario, I could rent it out and make a little bit of money or lose a little bit of money. But it's it's right at that area, and it's something that I could easily manage within my monthly budget. So this is something that you really want avoid but keeping up with the Joneses. And this is another way of saying this is income creep or expense creep. And so what happens for most people is that as your income increases, you typically want to spend more because you want to increase your standard of living, so you're you know you're eating better. You're eating out more, you know, you having more luxuries in life and That's great. You know, I think that, you know, everybody deserves that. At the same point in time, you also have to realize that you're not getting ahead right. Your income is increased, but your expense basis increased. And so the amount that you're saving in absolute terms may be increasing. But as a percentage it won't be increasing, and I'll go into that in a minute. But it's it's a lot more of a rickety or unstable financial platform or foundation to be building your your home on. So really remember that you know, you need to be saving more and more with each income increase that you get and making sure that you keep a close eye on your expenses so that you're not spending more and more and not getting ahead. Because what's the what's the point of moving ahead in life if you're not actually getting ahead in life from a financial perspective, a swell. And please remember that the how the down payment on your home is just the start, you know beyond that you have closing costs, property taxes, homeowner's insurance, interior decorating, home improvements, other whole miscellaneous expenses, and you still need to maintain an emergency fund because you don't want to be kicked out of your home. What if you lose your job? But you have some, you know, major life setback or significant medical expenses or things like that. So don't put all of your savings towards a down payment by any means. You know, figure out how much of an emergency fund you can maintain and then above and beyond that, what you can put towards a down payment. And, in the words of Warren Buffett, do not save what is left after spending but spend what is left after saving very wise words . So figure out what you want to save and what you can save by tracking your expenses every month. Set a goal and say, I'm gonna save 15% of my income after tax. I'm going to save 20% of my income after tax and take that money aside and then spend the rest of that right. But don't spend your money first and then be like, Oh, I was only able to save 2%. That's a very important mindset shift that again is not taught in school but is really absolutely critical to get ahead in life. 13. Home Course 5 Factor Analysis Intro: welcome back to Section two on our five factor analysis. So the five factor analysis of the five factors that impact your ability to buy a home and they are your earning ability and history, savings, debt, your credit rating or your credit score and hard work and being a savvy buyer. So let's start with earning ability in history. So, really, for this, start with your after tax income, and I recommend using a previous three year average to have more stable results so you can find that on any of your text tax filings or, if you happen to just know what it is. Great. That's your starting point. Okay, so let's look and see it. What can you really afford at 10%? So what is 10%? 10% is a 10% savings rate. And so I'm gonna break this down for you based on a couple different factors. So you have annual household income from 40 to $120,000 and then we look at that on a monthly household income, so just divided by 12 and this is what it looks like and then this is estimating an income tax rate now, it's estimated, could be different. It doesn't really matter. It's because you're going to be doing this calculation for yourself if you haven't already , so that you know where you're at. So you'll have your income tax expense and then the number that were more interested in which is your annual household income after tax and your monthly household income after tax ? Because all of the money we spend as individuals that's earned through salary, etcetera or through other income is taxed one way or another. And so you need to know what your after tax numbers look like. So if we take a monthly household income after tax of $2589 we save 10% of that, that would be $259 a month. If we had an after tax household income of $6660 a month and we saved, 10% would be $666 which means inversely, you have $2330 of $2589 that you can spend on household expenses. Sophie remember Warren Buffett's quote that it's about. I'm paraphrasing here, but it's about saving first and then spending second. So that's what we're doing here. We're saving. And we're going to say we're gonna automate this if possible, and we're going to save this at least each and every month. So if we said we're going to spend the maximum amount of the debt to income ratio suggests , or what just seems feasible for most people at 28% of your income, well, that's $652 that you could be spending on housing, right? And this number is increasing as your income increases. Obviously, so some people may be curious to see Well, all right, well, what and be thinking, what should I be spending on my housing expenses? Right? And so in the Thin Green line by the money Secrets of the Super Wealthy by New York Times Wealth Matters columnist Paul Sullivan, the author, notes that the wealthy and rich families spent around 22 to 24% of their income on housing . Now, you may think that well, because people that have more money that they can spend less as a percentage of that on their housing. But also remember that you have this creep which comes up so the more money you have, the better standard of living that you typically want. So it is true that the more money you have and if you're staying in the same home, it would be a much less percentage of your overall income. But it also means that you know, people that have a lot of money understand how their money works better in many situations . So the idea that you can spend 22 to 24% and not 28% I think, is a good general rule of thumb to spend as less a percentage of your income on housing, the better off you'll be in, the more money you'll have to save and to spend on other things. So again, it's not about the price of the house, but it's relative expense to you. And that's another reason to not spend the maximum 28% of the front end general recommended in the debt to income ratio, and this is a big point. But don't be misguided by online calculators. You really need to do your own calculations, so I have great respect for Nerdwallet, and I really like a lot of the things that they do. It's been a great resource for me in the past, but when I plugged in information in terms of what I could afford for a home, it told me that I could afford a home of $454,648. Well, that's really not realistic for my income. And just to give you an idea of the house that I ended up buying was $198,000. So about half of what they were recommending, actually less than half of what they were recommending by a lot. So please don't be misguided by online calculators because there's a lot of assumptions that go into it that you may not be able to see. And so I really recommend doing your own calculations. Okay, so let's let's be a little bit more aggressive in terms of what we wanted to save. We have the same table here. The only difference is now that we're changing our monthly savings rate from 10 to 20% and seeing how much we would have to be able to save and then how much we would have to spend on household expenses. And so if we look at, then the maximum housing expense we could pay with 28% of art help maximum household expenses, we would only be able to spend $580 on housing up to around $1500 on housing. So this is where the numbers start to get a little bit more riel or more personal, I think, and it's really important to stress. Test your financial stability and just, you know, not every day, but every now and then. Ask yourself or do a scenario analysis and see it well, if you lost your job today, how many months would it take you to find a new one at the same level of income in the same area? So you might. This is a problem with having a great income in an area where there's not a lot of companies that can support that, because if you fall off for whatever reason, the high end of the heap, so to speak, or the top of the pyramid, well, then it's a long fall down, and so it's important to keep that in mind. And then also, look at how many months could you maintain your current standard of living, including housing payments? If you did have that sort of unfortunate situation, so can I find a job around the same level of pay in the same area fairly easily? If the answer is yes to that, then you're in a pretty good place. And if you and if you understood that it would take you around three months to four months , you know, toe to find a job, and you can easily do that by talking to people that have been through the experience somewhat recently, or you could go in and talking to the labor bureau or other resource is around that to figure it out. Then you'll know how many months at a minimum would you need in savings to maintain your current standard of living, including housing payments, because we don't want to be on the street so and then another one would be all right. How many months could you live in the same home, but cutting other expenses as much as possible? So, you know, really figuring out where you're at Um, and then, as you progress in your career as you move up, you know, depending on where you're at, there might be fewer and fewer jobs that are available that may or may not be the case. And then what is the population trend in your area? Is it growing or shrinking? How is the area economy? Because these things all impact housing prices. I personally believe in planning for the worst and hoping for the best. And so I would like to ask you, you know, in the previous nearest, did you find yourself thinking about how much home you could afford using the maximum 28% gross income to housing, which is a bit more of an aggressive scenario? Or worse yet, I hope you didn't start including your future planned or hoped higher income in your calculation of what level of home you could afford. So if you're everyone, we did those financial checklists where I'm gonna be in 12 months. Well, did you give yourself 10% or 15% or 20% income increase? Um, you know, when that's not fixed, can be, you know, you can change the numbers significantly if you didn't do any of this good for you. You know, that's that's the better way to be. I feel so. Where you want to be is ideally, should still have 6 to 12 months of living expenses saved above and beyond the down payment and closing costs on your home, just in case tough times come your way. And the outcome of that prudence is that you will. You have to work a lot harder to save because it's not easy to get there, but you will have a clear goal and reason to save, so it'll be easier to do that. It most likely means you're gonna buy a less expensive home than a lot of real estate agents would like to sell to you. Or bankers would like to give you loans on. But you'll be a lot more financially secure when the next downturn comes, because it's always just a matter of time. We live in a psych lickle business environment and a word of caution kind of throwback to the financial crisis and the great recession. So why did people lose their homes? Well, a lot of times, people bought more home than they could afford, you know, they spread themselves thin. They tried to get the maximum home that they could get approved for with the expectations that home prices would increase over time because the economy is good there increased their income would also increase over time. But when home prices decreased and their income one away, this is why I was asking those questions about how easily would you be able to find another job at a similar level of income If you're because I've I've been through this personally. I've been in a situation where I was earning X. And then the next closest job that I was able to find on a short term basis was about half of that, believe it or not, which is crazy. Um, but, you know, markets can be like that sometimes. And so you need to be able to whether any storm that comes your way, if you wanna have a solid financial household, so you know, and then the people that went even above and beyond in, you know, financial. Ah, you know, that did find things financially that really do not make sense, you know, is taking out second mortgages to buy assets which only depreciate over time, so cars boats off a TV s. Um, you know, travel any of these things while they have value to you, they don't have value to other people. And so all of that sentimental value does not have much of a market value. And so it's a It's a losing equation because you're paying interest on an amount. So if you paid ah 100 for something now with interest, that's gonna be 105 110 on 120 depending on the interest rate and length of the loan and then the value of what you bought is gonna be much less so. It's just an equation for financial disaster and then not having a significant or a sufficient enough savings cushion to see them through hard times. So then falling behind on payments and then losing homes savings. And then when you lose your home and you default on the loan, then you get hit with a really low credit score, a swell so it makes it a lot harder to recover in the future. And that impacts things like from anything from applying for a credit card to private mortgage insurance to your home interest and payments etcetera. And then other people also overextended, bought second and third homes, banking on the increase in home prices and not think about what would happen if things went south. So if they had looked at the income approach and they were able to buy those homes and even if the market value what became half. But the rent was enough to cover the cost of the loan the people loves, people would not have needed to sell, and they would still be much better financially off. But if you don't look at the income around that and you only buy from a speculative perspective, which means you hope or you think or you bet on prices increasing in the future with no one having a crystal ball, then you have a lot less room to stand on. So again, plan for the worst hope for the best. After the great recession, it became painfully clear to many families that it can be difficult to find work. It can be more difficult to find high paying work and a good job that you find may well not be in the same area that you were working before, so you might not be able to commute anymore, Which means you might have to sell your home at a loss which is again money out the door. So, you know, people may be saying, All right, well, we're in this great economic expansion times or different. Well, and I would say I would question that because and, you know, and advised to air on the side of caution because, you know, you never really know what's going to happen. You know, we're in the longest economic expansion since the, uh, you know, since World War Two era, I believe, and so you know it's going to come back. You know, sooner or later and so at most, use your current income as a base for planning your future home purchases, and then it best look at other jobs in the area that you're qualified for, and use a lower expected income to calculate how expensive a home you can afford again. You might not want to be this conservative, but some people will be, so I'm just putting it out there, so it's ah, it's food for thought. Another reason to be prudent is if you're spending too much on your monthly mortgage, that's money, which you cannot put towards saving for retirement vacations, your kids education, unexpected high medical bills, etcetera. So you start to get spread thin. And what would normally be a minor setback can easily turn into a downward spiral that throws your life into chaos. So it's good to face those fears and be realistic about them and see all right, well, what is the worst case scenario that's realistic. So I've just laid out one here, which is, you know, home prices sharply to Caroline Shortly after buying and continue to stay low, buyers disappear from the market and banks stop giving loans. So this is what the situation was in 89 6010 in much of the U. S. Ah, the market recovered. I believe it was from around 11 4012. So if you would have been able to hold out, then you would have been, you know, okay, as long as your income was sorted and so how likely is this? Well, it's fairly likely it happened in 8 4009 It happened in the mid eighties in the mid nineties, and we saw the national downtrend between 5 to 9 years. So really, you know, it's it's important to be able to stay for the long term. And so what can you do to protect your investment? Well, it starts with buying smart, you know, buying like an investor and not a retail buyer. And that's buying homes that are worth more than the current asking price or the current market price. So with that, you know, equates to is a lot of hard work searching for homes which are priced a bit under the market and then negotiating or being in a position where you can negotiate for cheaper prices and make sure that your total housing expenditure is less than or approximately equal to what you could rent it out for if you had to again, nobody can know the future, but you can go with based on how things are now, and you can be pretty sure that if you're in a difficult situation regarding buying homes, etcetera and the overall general economy, like we had in the last financial crisis, that you're not going to be the only one, you know, and what we saw there was that there was a big increase in demand for rentals because people didn't feel confident in buying homes where they didn't have the savings or they weren't in a financial position to buy the homes. And so people that have the homes had an asset that was easily rented out and make sure that you're paying less and mortgage and home in ownership related expenses than you would be to rent. That's kind of similar. This last point, we just sing in another way. 14. Home Course 5 Factor Analysis 2 Saving: on to the next point. So after are earning ability in history, it's your savings. And so and this is there's a lot that goes into this is well, so how much savings do I need? It's kind of, Ah, big question, but there's a lot that goes into it. So in terms of out of expenses, out of pocket expenses for buying a home, the first so I'd like to talk about is earnest money. Earnest money is a good faith gesture that shows that you're serious about buying the property and not just wasting the sellers time. So how is the money used? If you do buy the home, it's deducted from the closing costs and down payment. If the deal's falls through, you should get your money back as long as it is properly documented in the purchase agreement, terms and conditions and you have it set up that way. So who keeps the money or who do you write the check to or make the bank transfer to? It's usually the title company or real estate broker that will keep the money. It's not the seller, so you should not be giving that to the cellar that's just important to be aware of. And so the amount is, according to realtor dot com, you should expect to pay between 1 to 2% sometimes more or less, of the home purchase price on a approximately $200,000 home that would equate to 2 to $4000 . I paid $2000 on my similarly priced home. Okay, next point. How home down payment. So here there's sort of two schools of thought, and the 1st 1 is to pay 20% or more down. And so just a quick illustration. What does that look like? 203 104 $100,000 home. You're looking at 40 60 or $80,000 cash up front just for the down payment. Now, the other school of thought is really pay as little as possible, which is around 3 to 6% sometimes less again. It depends on the loan and the lender, but what does that look like? And again, on 203 104 $100,000 home at 5% kind of middle range. There you're looking at 25,000 $20,000. So this is just ah point to do a bit of a reality check and see where you at in terms of your savings and what can you really afford in terms of a down payment? Now, what is the benefit to paying 20% down? We're going to save thousands to tens of thousands of dollars and interest expenses over the course of the loan. I'll go into this a bit more, but basically the reason is because the loan you're paying interest year on year over 15 years or over 30 years and that expense just adds up. Um, you know, if you're having 20% versus 5% that's a 15% difference over time in terms of what you've paid down on the house price. So you're gonna be paying interest on that 15% over and over and over again. And so it also means that you're gonna be able to pay off your home that much quicker or that, but you're gonna be paying that much less. Every month is another way of looking at it. The drawbacks is obviously, you know, it's a large up front expense. A lot of people struggle with a high down payment and you're able to purchase a less expensive home because it's all interconnected. So what is the benefits of low to? No down while you're able to buy a more expensive home, which may or may not make sense for you financially, but you would be able to afford more and you'll need less savings so you can buy a home quicker or when you're younger. The drawback is again. You have the higher cost associated with the interest expense on alone, and you might be tempted to buy more of a home than you can really afford. So let's take a look and quantify this a bit and look at some real numbers. So just how much of a difference does the down payment amount make? So if we look at two homes, both price the same at $200,000 the down payment percentages 5% for one and 20% for the other. The down payment amount would be $50,000 respectively. The loan amount would be 190,000 and $160,000 respectively. If we look at the same loan period or loan term the same interest rate. Your monthly payment is gonna be $934 at 5% and $787 at 2027 at Excuse me at 20% now, because you're paying less than 20% in the 5% example, you're also going to have to get private mortgage insurance. And if we assume a 680 credit score, that's gonna work out to be around $171 a month. Now, the private mortgage insurance, until your equity reaches 20% is gonna take you 108 months of payments. Yet that's a lot. So if you just take 108 months and multiply that out by $171 a month, it means you're paying $18,468 more than if you'd paid 20% down to start with. So what is the interest expense over the term of the loan? It's $146,486 at 5% down and $123,357 at 20% down so your total expense for the loan is $364,000.954 to 5% and $323,000.357 dollars at 20%. So you're saving over 30 years, $41,597. Sorry, that's a bit cut off at the bottom there, but it's $41,000 which you're able to save just by paying a bit more, although you would need the savings. So that's why this sort of delayed gratification waiting a year or building up your savings mawr or buying a cheaper home can really save you a lot of money. OK, moving on to closing costs. So what are closing? Costs their costs. The bank and other third parties charge you to issue the loan. The amount is typically between 2% to 5% of the purchase price. I paid a bit over 1% by shopping around and here. A couple examples. You have your loan origination fee or administration fee appraisal fee, credit report, flood certification, title fees and there's a number more. So if we look at this data from bankrate dot com. The average mortgage lender fee by state in 2016 is looking like this so you can kind of see where you're at or your state is out. Um, again, it's It fluctuates a bit, and you should really get a proper quotation, but this is a point of reference, so closing costs there's ones that you can shop for ones which you can't. So the origination or administration fee appraisal fee credit report entitled Report. Our Title Insurance, I should say, are all fees that you can shop for the administration fee, appraisal fee and credit report are all influenced by which lender you go through. The title report is influenced by Wish title company you go through. There's expenses that you can't shop for, though, like taxes and government fees and some other third party fees, which you just can't influence. Unfortunately, okay, next is any home improvements. So, unfortunately, your home purchase loan will typically not cover any home improvements so expected to come out of pocket. This is something you'll need to confirm with your lender, but that's typically the case, and it could be a good option if you have liquidity issues though, Um, and you want to buy a home that needs some repairs and improvements. So what I mean by that is, if you do want to buy a bit of a fixer upper than make sure you have alone, which covers the cost of repairs and improvements, and these are a couple examples you have an F H A two or three K mortgage standard two or three K mortgage Limited two or three K mortgage and a Fannie Mae Homestyle renovation mortgage. Now there may be more above and beyond this, Um, and you'll need to look into these individually. I get into some of it a bit later on, but this is not. This is not really something that I'm spending a lot of time on on this course because a lot of the major home improvements. Typically, most people wouldn't buy a home that needs a lot of major home improvements unless you're getting a great price for it. So it's again. It's good to look at and understand, but it's it's not the best option that usually comes with higher costs, and you'll end up paying more, and it's a lot more rigid. So you know. Another thing is, are you handy? You know, you may be able to save a significant amount of money by buying a fixer upper and making improvements on it over time. If this is an area of strength to you, you know if that is great for you. But keep in mind that all improvements on the home should be cosmetic. So stay away from shoddy foundations, poor electrical wiring, leaky plumbing, leaky, rooves, etcetera. Unless you're really getting a tremendous deal and are equipped to deal with those issues because you're looking at thousands to tens of thousands of dollars really quickly, it may eat a lot more time and energy than you expect. So look online or talk with people in your area who have already been through it. If this is your first time, you know how flexible is your job or your family time. Sometimes it's not worth it to put in all of those hours into a fixer upper, and sometimes even after all of that, it's still, you know, not the best place to be in because it wasn't built properly to start with, you know, be sure to get a loan that will cover the costs like I was talking about and have an estimate in terms of what it will cost to back it up. And then you also need to factor in all of the headache of working on weekends, dealing with contractors, washing dishes in the bathtub, etcetera, before your home is ready. The last point on this is furniture and furnishings are finishings. Excuse me so you can spend as much or as little as you want on this, but a minimum budget of a few $1000. It's going to be required so you can save money by planning ahead and shopping during larger sales, buying only what you really need. Go to garage sales and look on Craigslist or local Facebook garage sales guard Rochelle groups for deals. And we were really save thousands of dollars this way. You know, I think that it's it's a great way to do it because you can. You can buy a cheap couch to start out with. You know, we got one for 25 bucks at a garage sale, and it's not bad. It's not beautiful. It's not great. But we have young kids and you know, we don't want a beautiful couch right now, and it saves us money up front. So, you know, two years from now or three years from now or whenever when we do wanna upgrade, we can do that gradually. So a final word on savings here and not too overdramatic. Size it. But you know, please don't be like the ancient Roman Empire, you know, And really ask yourself, Why did Rome fall? And the answer here is over expansion and overspending. So buying, if you know, putting this in the terms of home buying, buying more home than you can afford. So, going with a low down payment and a long loan periods of let's say you're going for a 30 year loan, 5% down payment, meaning you can afford a 456 $700,000 home, depending on your income. But then, when you look at the monthly payments on that, that eats up a huge percentage of your income, and so you having a high fixed cost structure. And so if anything untoward or anything, backwards or anything, unplanned comes to hit you, then you're really going to be in a poor position, and that's how it's easy to fall, and then if you also your spending it's out of hand, then it makes it really difficult to come back. 15. Home Course 5 Factor Analysis Financial Stability: financial stability. What is that most personal finance experts recommend, having between 6 to 12 months of living expenses saved in an emergency fund? Three. See you through hard times and in my personal experience again, not everyone's the same. This has been something which I've needed to have. You know, I was working during the financial recession, in finance and, you know, jobs disappeared that were no new jobs, I to get into a new industry. I luv to a new city. Um, you know, So it was really important to have savings to see me through that, Um so let's let's figure out what your savings rate is and do a bit of a reality check. So this is a bit scary math, but I think it's really important for everyone to understand. So if we look at the ink income after tax, I'm just jumping ahead here to assume that everyone's already done the homework and understands how much they make after tax. And I'm just using simple numbers here, So ah, 100 across the board. And then, if we look at expenses again using simple numbers across the board and we're saying seeing where savings are again across the board. And so what is the savings rate? So we're taking our savings divided by the income after tax, and that gives us a income after tax savings rate of 2% to 30%. So how many months would you need to work to save up one months of living expenses? So if you spend everything that you earn or almost everything that you earn your in this red category, right, so you may not believe it, but you can do the math. You're gonna have to work 49 months to earn one month of living expenses. If you're only able to save two months 2% of your income after tax. Now you can see this improves significantly as you go along. So even from 2 to 5% we're seeing a huge increase, and then from 5 to 10% another huge increase. And but if you recall one month, living expenses doesn't get you very far right, who's going to find out that they're losing their job or get hit with unplanned expenses and then have to recover from that? Well, nobody is able to do that in one month, right? Six months is even quite aggressive. But if you multiply that out 49 times six is 294 months or 24 a half years. So most of your professional working life right? Or if we look at this one at 5% it's gonna take you 114 months or almost 10 years to save up just enough to survive for six months. So I don't think anyone would judge that to be financially stable and you want to at least be in the yellow zone. But really you want to be in the Green Zone, which means you need to be working hard to save 20% plus of your income. And if that means that other sacrifices need to happen, then they need to happen, because this is where you're really seeing, how stable or how strong your financial foundation is. And you can do this gradually over time, a swell as by increasing your savings rate each time you get an increase in income. So if we contrast these two, so if I wanted, if you wanted to work, sorry, if you want to have 12 months living expenses saved up again. This is nothing if you start considering retirement. But if you wanted to have 12 months living expenses saved up in the red here at only 2% it would take you 49 years. So if you started at age 30 you'd be 79 before you got there. It's gonna take you 19 years at 5%. So again you'd be 49 before you got here. Which is not a good time to be buying a new home. You know, especially if you're looking at a 30 year loan. If you're a 10% it's gonna take you nine years, so you're gonna be 39. And this isn't even your down payment, right? So you really need to be in the green zone here if you're gonna be saving up a down payment and have an emergency fund. So I want you to really internalize the difference that it makes between saving 5% and 20% in terms of what you're able to save over time, you know, because going from 5% being at a year, your 49 5% being at a year of living expenses. You're 34. That's night and day difference. So in terms of sample household income statement to look through this you have income expenses which are broken down between variable and fixed, and at the end we have a gain and loss, which is in savings. I've a fictitious example here, which is Mr A, Miss B and Mr C, who have monthly income of 56 and $7000 again, these air fictitious tax rates. But again, we're getting to our after tax income and then we're breaking down because we've already tracked all of our expenses, right? We know what everything is. So this is just to help you with that as well, though. But here's all of your fixed expenses, like your mortgage, your student debt payment, your Internet, your home insurance, your health insurance, etcetera. And so we're getting to a sub total and then a percentage of your after tax income. And then you have your variable expenses, which your like your groceries, eating out entertainment travel, etcetera and a sub total and a percentage. And then we're going to see our monthly total are in of expenses monthly, total in savings and our monthly savings rate and I hope I didn't go through that too quickly. I like to move on to the next point, which is between Mr A Miss B and Mr See who could react better to a challenging life situation financially and why? So I want you to give that a little bit of thought. And, you know, word on that is I'm kind of leading here, but, you know, be careful of fixed expenses. So when business go through tough times, they're forced to cut costs thes start with less essential items and move on their way up to people, property, equipment, and so on. So if you have too many fixed expense items, there isn't much room to cut. So be cautious when choosing your monthly mortgage amount. This is how a lot of people lose their homes. They buy home that has already stretched from where they're at planning on increases in income to support them. The challenges that income arises, so do our appetites and spending increases to along with taxes. The end result is that while the standard of living has increased, the financial stability has not. In fact, it's only gotten worse. So why? Because if our income were to decrease than it would send even greater shocks to the system and be much more difficult to recover from. So if you have a fixed expense, right, but your income decreases, you can't change those quickly. So again, going back to this if we had to cut, what could we cut? Well, the answer is typically it's only your variable expenses you're able to cut in the short term. Which is your groceries eating out, entertainment, travel, utilities, etcetera. In the mid term, you can cut mawr, but it becomes painful very quickly. We're going to say we're going to get rid of our Internet at home, moved to a prepaid phone, a lower level of home insurance, a lower level of car insurance. Really, These are places that I think nobody wants to go and cutting your cable. And if the above isn't enough, this is when things deteriorate quickly and people tragically lose their homes. 16. Home Course 5 Factor Analysis 3 Debt: Welcome back. Next, I'd like to discuss debt. So how will debt affect my ability to to buy the home I want? Debt comes into play when loan officers are assessing how much you can reasonably pay each month towards your mortgage. The debt to income ratio is how they do this, which I will go into more detail shortly. Suffice it to say that the higher your monthly debt payments, the less expensive of a home that you can afford. So what is the debt to income ratio and how is it calculated? Well again, it's a calculation that tells loan officers how, for how much of a home can you really buy? And it's your monthly household income divided by monthly housing and debt expenses. And they break this down into two parts, and you don't really need to understand all of the mechanics of this. I think it's just good general background knowledge for you and, ah, good rule of thumb to see how much of a home that you'll be able to afford. So if we look at the front end, it's the total percentage of income that goes towards housing, and that includes your monthly mortgage payment, home insurance, property taxes, association dues set, etcetera. And that should typically be less than 28% of your household income. Now, this isn't the only part of it, so they look at it in a hole. And so there's the back end of this, and it's everything in the front end, plus all other debt payments. Such a student debt, car payments, child support, credit card debt, etcetera. And this should be typically less than 43% of your household income before taxes in order to be considered a qualified mortgage. Now, what is a qualified mortgage, and why should you care about it? Well, it's really important, actually, because a qualified mortgage is a mortgage, which is protected by various laws and it make sure that you're getting a fair deal. So, according to the Consumer Financial Protection Bureau, a qualified mortgage is alone. The borrower should be able to repay, and there's a rule around this called the ability to repay rule. And it's a reasonable and good faith determination of your ability to repay that lenders are required to assess and manage. And then it's safer, and it's easier to understand there's limits on how much income can go towards debt. They have rules regarding how your statements have to be displayed and certain notifications around your statements like, What is your total amount of interest that you're gonna be paying over the course of the loan and things like that? So you really want to understand what you're getting into and make sure that you're dealing in a product which is properly regulated. It should be a fair deal, so there's no excessive upfront points or fees, which are allowed. And it doesn't have any risky loan features such as interest only period, where, you know, like if you're buying furniture or something, they'll let you only pay interest or pay nothing down or things like that, but on a home loan that's not allowed. So you don't wanna have only paying your interest down. You need to be paying the principal down as well. There is no negative amortization, which is a feature which would allow your loan principal to increase over time. That's definitely something that you don't want, and it doesn't allow balloon payments where you could have a larger amount at the end of the loan, so What that would do is it would allow you to get into the loan on ah, cheaper monthly amount and probably cheaper down payment as well. But then, at the end of the loan, you'd have this large payment that you'd have to be stuck with, and most people wouldn't be able to manage that. So the bottom line is your mortgage should be a qualified mortgage, and please double check to make sure that it is. All right. So let's look at a illustration in excel. Okay, so I've done to general scenarios here, one looking at a 15 year mortgage, the other looking at a 30 year mortgage. And then, in each of these scenarios, I've adjusted the down payment between 20% and 5%. So you can see how that impacts the amounts in terms of what totals you'll need to be paying on a monthly basis and what sort of income you would need to have to be able to afford that level of home. So, as you can see, I have on all of these examples home prices between 205 $100,000. Again, we have a 20% down payment which tells you how much down payment you would need again. Down payment isn't the only amount there's closing costs and other costs associated with getting alone. But I'm just looking at the down payment for the time being. So what would your loan amount be? What is the loan period? The interest rate? And then what would that equate to in terms of a more monthly mortgage payment? And then, if you add in the monthly property taxes, assuming 1% uh, using the general rule for homeowners insurance, which is your home purchase price divided by 1000 and times $3.5 for an annual amount, and then you divide it by 12 for a monthly amount. In this example, because we are paying 20% down, we don't have to pay private mortgage insurance, which is great. And then we're assuming that there are any household association dues or homeowner's association dues. So what does that look like? It's saying that in order to buy $200,000 home well, it would cost us $1349 a month. And if we assume the high end of the front end portion of the debt to income ratio. We should be making $4819 a month, or we should be making $883,000 a year. Similarly, if we look at the $400,000 home, we would need to be paying out around $2700 a month. And in order to be able to afford that, you would need to be earning around $115,000 a year. Now this is the front end portion, and I'd like to go ahead and talk about the back end portion, so the back and portion is all of your debts. So what is your credit card payment? What is your student debt, your car payments, child support or any other debt that you may have? So I've just put in some dummy numbers around this to illustrate the example, but we'll need to do is actually go in and put your own numbers and see how it works out for you. So I have. Let's look at this example on the $200,000 home, let's say you had $100 of credit card debt, which you're repaying every month. You had $100 of student debt, European every month, $100 in car payments and no child support or other debts, or paying $300 a month in debt repayment above and beyond all of your home or housing related expenses. And just a note on this. If you don't already own your home, they won't look at your mortgage. But they'll look at what you're paying in rental. Your what your current rental is to calculate this number. So the grand total Well, sorry. Excuse me. They would also look at they would take that information into account, but they would base it on what the price of the home would be and how that would work out for you from that calculation. So sorry if that was a bit confusing. So the grand total in terms of the front and back ends adding those two together is $1649 a month. And then, if we assume the highest back end debt to income ratio of 43% for qualified loan, that's where this numbers coming from. You would be needing to make $46,000 a year to buy a $200,000 home. So this is again an aggressive scenario, and it's very different. So if we look at just the front end right, we were needing to make $57,000 a year. But on the back end, you know, is around $10,000 less, so that depends on the lender and what their individual requirements are. But as a general rule of thumb, you can know that you would qualify. Or you would most likely qualify for a $200,000 loan if your annual income was around this number. That being said, that doesn't necessarily mean that it's the right amount of home for you to buy, and I touch on that in other areas. So this is the example where we have 20% down payment. I'll go through quickly what it looks like with 5% down payment. The difference here is that your loan amount is going to be higher. You're going tohave higher monthly mortgage payments. You're going tohave private mortgage insurance so you can see that the totals here. So if we had 20% down, you're looking at 1349 on a $200,000 home and on a 5% down on the same $200,000 home. You're looking at 6 $1646 a month. You would need to be earning $57,000 a year in the $200,000 home, a 20% example, and you be needing to earn $70,000 a year at the $200,000 home at 5% down example. So I hope that makes sense for people. Yet I'll have this as a resource so that you can go through it slowly at your own speed and understand how those numbers work together and then also be able to plug in your own numbers. So I'd also like to touch on now how I arrived. These numbers, right? So home price is obviously just a made up number down payment. These numbers are simple calculations, right? This is I think anybody can do that. So, at 15 years, 3.5 3 and 1/4 or 3.25% of an interest rate. So where does that number come? from. So that number came from actual quotations that I received from lenders, and I recommend you go ahead and get quotations even if you're not looking at buying a home . Right now, there's a process which is called getting pre approved for a mortgage, and it's something that you need to do earlier on in the process once you start to seriously get into looking for homes, because none of the real estate agents or sellers are really going to take you seriously until they know that you have your financing lined up and the way that they do that is through the preapproval mortgage letter that or guarantee which you would get from the bank and its a letter that has. I'll get into this again later, but it has. You know, it says that you're guaranteed or you're qualified to pie this amount of home and you know they give a bunch of qualifications on that as well. But it's it's usually what buyers excusing what sellers want to see and what real estates also want to see to make sure that you're serious about it, and that you are, you're somebody that will be able to get their financing because nobody wants to waste their time. So the mortgage payment you can calculate using an online calculator or an loan amortisation schedule. This is what a loan amortisation schedule looks like. So you would input your loan amount here, the annual interest rate, the loan period, and then it will go ahead. And it will calculate out for you what your total payment is on a monthly basis and what the break up between principal and interest is for you, and then what you're ending balance is and your cumulative interest. Um, and this is helpful because it will tell you up here at the top. You know, what is the total interest you after you paying over the loan? If I have put in an extra $500 here in early payment, you can see that impacts all of the numbers as we go along here. So it's a handy tool tool toe have, And again, I'll have this available for people as a resource to download. So the the long and short of this is is that on a 15 year mortgage, the more you can pay down the lower your monthly expense will be and the more expensive of a home you can pay, the less savings you have, or less ability or less desire to put into a down payment. It will mean that you're going to have higher monthly mortgage payments and that you're going to need to have a higher income to qualify. And that's the same whether it's on the front end or the back end, right? We can see that there's around, Ah, you know, fairly significant difference which increases as the amounts go up now on a 30 year mortgage. It's the same thing. I just wanted you to be able to see that the amounts differ. And so basically what the conclusion of this is and I get, I'll have this as a download resource that you could look at. But you can for a lot less amount monthly. You're going to be able to afford mawr home, right? So according to this, at on a 30 year mortgage with 20% down, you'd only need to be making $43,000 a year. And if we go out to the back end, it's even less is 36,000. Now this this just feels a bit aggressive to me. You know, this is just a feeling it's not based on, you know anything, but I just have a hard time seeing how somebody could pay $1000 when they're only making $3000. So I mean, that's, you know, it's just a personal, you know, feeling. But I would I would not recommend going for these more aggressive scenarios. So again I'll have. This is a resource. I hope this is clear for people. The more you can pay and down, the less you'll pay every month and the less you'll pay over the course of the loan on. And then there's also the big difference of whether you have to pay private mortgage insurance or not, so it impacts what your total monthly amounts are as well. 17. Home Buying 5 Factor Analysis 4 Credit Score: next, I'd like to talk about your credit rating or your credit score. So what is a credit rating? Our credit score. It's a statistical analysis of a person's credit files to determine their creditworthiness and credit bureaus drawn this from your credit card information. Any existing debt that you have so or past debt that you've had so home loans, car payments, student debt, all of these sorts of things. And so there's three main credit bureaus that calculate credit score, and they're usually known as FICO Credit score. And it's equal fax experience and trans union. So you may be wondering how you can know what your credit score is. So one popular free tool. It's a website called creditkarma. I've used it in the past. I think it's a good approximate gauge of what your credit score is. This was recommended meat to me by a bank employee. Please note that it is not a full report. It's not 100% accurate, so it'll just give you an approximate idea. So some banks will also give you your credit score for free, like Bank of America or some other banks. If you have a credit card through them. But police note again, This is not a full report. It just gives you a basic idea on. The nice thing about this is you get it on a monthly basis for the banks on the creditkarma . You get it on, you know you can check it any 24 7 anytime you want. Um, and I'll go into more about what affects your credit score a little bit later. But the rial tool, the best one, is to get your full credit score, and you can get that each year for free from the three companies list above. So Equifax, Experian and Trans Union by going to annual credit report dot com. And be sure to go through it and make sure there aren't any errors on this, especially if you have debt payment issues or you've had any claims against you in the past , because this can seriously have a negative impact on your credit score. And so, believe it or not, not having enough credit works against you. So this is a problem that I came in. I didn't have a lot of debt, and so there wasn't a lot of information for the credit agencies to go off of. So what I did is I spent a certain amount of time number of months actually building up a credit history. I took out an additional credit card Ah, and made sure to repay that every month. Now, just taking out credit cards in of itself isn't a short term strategy, but it can be more of a midterm strategy to help lower your credit score. The reason for that is that you have more lines of credit, and also if you're able to have a lower utilisation amount or you use less of what your total percentage of your line of credit is. So if you have a limit of, let's say, $2000 on a credit card and you're spending, let's say $2000 every month where your utilization is really high. You're using 100% of your limit. But now, if you have two cards as opposed to one, and they both have a $2000 credit limit and you're using $1000 on one and $1000 on another , that's a lower utilisation rate and ideally, you want to be less than well if you could be less than 10%. It's great, um, so really balancing your use of debit and cash and check with credit before you're in the months prior to when you're seriously starting to look for homes is a great way to start to increase your credit score. So if you've never had a credit card that you need to start building a credit history, Um, opposite Lee, if you do have credit cards and other debt, is very important that you pay them off on time or early every month because it will have a negative impact on your score. And so this is how why should we care about our credit? Score? Well, these air the brackets of credit scores. It varies a little bit depending on the credit reporting agency of the credit bureau, and the banks also have their own breakdown of this. But the main point being that there's our bracket of scores, the higher the score you have. The lower your interest rate is going to be so if you have poor credit, which is defined as 3 50 to 620 this is as off NBK C, which is a bank. Then it's You're not going to really qualify for a loan in the first place. So this is this is the starting point. You need to have the highest credit score, which is higher than 6 20 So if you're in 6 22 6 39 and these go up by brackets of 19 points, as you can see your in the need improvement and it's gonna be 4.75% of an interest rate, and we can see that this goes down as your credit score increases. So just the take away from this is as your credit score improves that your cost of the loan will decrease over time. So even if you're not serious about getting a home in the next six months, or even, I would still make a lot of effort on your credit score, because let's look at how much that impacts your monthly payment. So again, this is your interest rate with the credit score brain judge, and then this is your monthly payment on a $200,000 home. So if I if you had a credit score of 6 22 6 39 you be paying 4.75% interest rate on a 30 year loan, which is a monthly payment of 1000 and $43. But if you had a credit score of 7 22 7 39 so 100 points higher, you'd only be paying 4.60% which is coming out to $961.76 now. This may not seem like a lot on a monthly basis, right? It's only $73.99. But over the course of the loan, when you compound that out over 30 years, it's almost $30,000 difference. I know it seems crazy, right, But if you do the math and you look at what it would cost you in terms of the interest payments over the course of the loan, it's almost $30,000. So this is a really easy way to save yourself. A lot of money is just to focus on improving your credit score as much as you can. So what impacts your credit score? So there's six areas, according to Fico, so it's credit card use, payment history, derogatory remarks and It's not insults your credit age, totaling count accounts and hard enquiries. So these air rated from high impact to medium impact toe low impact so credit card use keep it under 30. Keep your credit card use under 30% of your credit card limit and, if possible, keep it under 9% for the best impact. So, again, this is where you know what I did is for a number of months. I would only use my credit card to make one or two payments to show that I'd used it. So I was using 1% or 2% of my credit card available balance or my credit line for my credit limit. But why did with the rest was Ieast cash and debit card exclusively, and over the course of a couple of months, I was able to raise my credit score significantly, which helped me out a lot in terms of the overall cost. So payment history. This is something you don't want to get wrong. It dings you every single time. You get it wrong, so make sure you just automate these and you just pay the you know, really, if you have a credit card, you should be paying the full amount of whatever you've used. If you're not able to do that, then it means you've either had some challenging life situations. Or you need to review how you spend your money. And so using debit cards is a great way of doing that. We're using an envelope budgeting system and taking whatever your monthly income is and dividing that up amongst different envelopes or buckets and then spending your money that way. Um, is also another method that has worked for a number of people. So what derogatory remarks are collections, public records, anything where you've had a negative impact from the from collection agencies, etcetera, and this can stay on your record for 7 to 10 years. So this is nothing to mess around with. So you want to make sure that you don't get overly behind on any sorts of payments that you actually owe on so the credit age. So the longer you have your credit accounts open, the better so the longer you've had that credit card longer, you've had that student loan or that home, even though it feels a bit strange that you know, because you have. You know, you're getting danged for paying things off early, and it kind of Yeah, I mean, that's that's the way that they have it set up. So total accounts is the number of accounts. Ah, and again, the older they are, the better. So if you open up a bunch of accounts just before you try and get a loan, that's not gonna help you. You need to be a bit more strategic about it and do it months and months, if you know, preferably even a year in advance and then hard enquiries. Um, so this is if you're applying for a credit card or a car loan or a home loan. There's a inquiry from the lender to the credit bureau to see what your credit scores, and they get the full detailed credit report. So you want to have fewer of these, the better. And so when you're actually going about getting your home loan, the way to manage this so that doesn't overly impact you because you don't want to say, Oh, I have a 700 credit score and then you go out and through having a number of heart enquiries, you get knocked down, you know, 26 80. And then all of a sudden you're in a different interest rate bracket, and it's gonna cost you a couple $1000 over the course of the loan. No, that's not what you want. So if you do for home loans the credit bureaus recognized that people by and shop around for loans, so make sure that you do all of that within 30 days. So again be stirred strategic about getting your hard enquiries on loans and doing that all within 30 days of each other. So Fico is going reveals how you can improve your credit score. So the first thing they recommend is is getting the proper full report and checking your credit score and looking for errors, seeing if there's any incorrect late payments or amount owed information, etcetera, because this can have a negative impact on you, and it's easier to fix up. And then they recommend setting up payment reminders and reducing the amount of debt that you owe. So no surprises here has a bit long, Um, and you can also go on fight, goes website and read through all of this. I'll have the link in the links or resource is area, but this I'll just go through this quickly. So payment history tips contributing 35% to a FICO score calculation. This category has the greatest effect on improving your scores, but past problems like missed or late payments are not easily fixed. So again, pay your bills on time. You know, even if it's a couple days late, it's late. You know, it's it's like turning ingrates papers in school. So if you have missed payments, get current and skate current, so make sure that you don't have anything which is in arrears or that needs to get paid off . Be aware that paying off a collection account will not remove it from your credit report again. It's going to say in your report for seven years, so that's something that we want to avoid getting in the first place If you're having trouble making ends meet, contact your creditors or seek a legitimate credit counselor. So hopefully not in this situation and its its This is, ah, long term approach to improving your credit. Okay, next is in terms of accounts owed, So this category contributes 30% to a FICO score calculation and can be easier to clean up then payment history, but it requires financial discipline and understanding the tips below. So this is what I was talking about earlier to keep your balances low on credit cards and other types of credit. Pay off your debt rather than moving it around because all of these agencies and credit card companies they all report and talk to each other. So there is no from left hand to right hand solution. And don't close unused credit cards as a short term strategy to raise your scores. Ah, and then don't open a number of new credit cards that you don't need just to increase your available credit again. This is something that they're going to be able to track and see in the short term. So you need to spend a bit more time on this, um, and also work on increasing your credit limits on the cards that you do have. So the length of credit history there's not a lot that you can really do about this. It's just if you've been managing credit for a short time, they recommend don't opening a lot of new accounts to rapidly so again. Like I said, this is not a short term solution. Don't do this two months before you're looking to get a loan. It's not gonna help you. So for new credit, get tips. Do your rate shopping forgiven loan within a focus period of time, so again, do this within the 30 day period for home loans. Re establish your credit history if you've had problems, so if you open new accounts and responsibly pay them off on time, it will raise your credit score again, though in the long term. And it's okay to request and check your own credit report so you can get this for free again, like I was talking about. So the types of credit used tips apply for an open new credit card. Accounts on Lee is needed. Have credit cards, but manage them responsibly and note that closing an account doesn't make it go away. So that's these are just some chips to understand. So what I did to improve my credit score personally is I just use a very simple strategy, and I went from around 611 because I didn't have much credit history to 711 in a couple of months, and what I did was like I saying So I used a small percentage of my credit limit by paying cash and debit for the rest of all of my purchases. You know, I got into the habit of using a credit card, but after understanding how the credit scores worked, I knew that I wanted to keep a low utilization rate or use a low percentage of my credit limit. And so I would just by a couple things on my credit card to make sure that I had something on there. And then the rest would all be cash, debit or cheque. And then I used auto payment for things like utilities, rent, etcetera or set up alerts for your credit cards. Make sure that you have all of your credit card alerts set up through online banking if you don't already so that you know whenever a bill comes due. Now, interestingly, there's it. Also in the whole utilization calculation is not based on the payment date, so the due date of when your payment is based on. It's usually based on a couple of days after the bill is generated, so it's very tough to game it. You know, I tried to just pay my my balance is off as soon as I got the bill, and sometimes I was successful that sometimes not because different banks have different methodology in terms of when they're getting that score and it's something they won't tell you. Believe me, I tried. I called up the banks that I had credit cards in and the representatives that you talked to even they don't know. So it's, you know, it's better off to just simplify it. I am to spend. If you have $1000 credit card limit, just spend $100 or, you know, 100 $50. You know, we're even better $50 get, you know, on gas or groceries or something, and then just the rest Cash, debit cheque, and then don't take out any loans in this time, as it will negatively impact your credit score. Now I've heard a lot of horror stories about people that were shopping for homes. They found the home they loved, They put in a offer, it was accepted, they got the loan approval and they were going through the process and then they wanted to get, um you know, a bunch of different home improvement things. So they went to a place like Home Depot and opened up a card and loaded that up and, you know, and paid a lot to on different home improvement things just before their home closed. Or somebody that went out and bought a car before their home loan closed. And they ended up losing that deal because the bank felt that it was a riskier customer, and so they weren't able to close their dealing. They lost their home there. They weren't able to buy their home. I should say so. You really don't want to be in that bracket, so don't make any major purchases. Don't get a car. Don't load up on home supplies, etcetera until your loan is completely closed out. The seller has received their money and everything is done 18. Home Buying Credit Report: All right. Welcome back. As promised, I'd like to take you through the credit report. This is a more recent one that I've taken off of the website where you can get your free credit reports. Um, which me just bring up here so that you can see that. But basically where you're going to go back to is your annual credit report dot com. So this is what the website looks like, and then you're going to click here to request your free credit reports and then you request your credit reports here, and then you fill in your basic information your Social Security number, your current address, previous address. If you've lived your current address for less than two years, and then it's gonna ask you a number of questions to verify your identity, and then you can choose to download all three credit reports that are available to you at the same time, or you can just do one, and you get one per year for free from each of the three main credit agencies. So I'm gonna go through this one, which is mine for equal facts, which is one of the larger ones. So you start out with a summary. You get the report date, uh, credit file status. So there's no fraud. You want to make sure that you're not having any fraud alert contacts again. None Average account age, four years. So this is a number of age in the age of the accounts that I've had length of credit history. That they have on file for me is 12 years and 10 months. The oldest. A Countess Student Assistance Foundation, which was a student loan that I had opened in March 9th, 2005. And then most recent, I opened a new credit card with Bank of America. So then they're going to go through and give you details on your credit accounts. So you having revolving now? These were typically would be your credit cards. The number you have. Open the number with balances, total balance available balance credit limit that to credit payments, mortgage on other. If you have, um, and then consumer statements, personal info, inquiry, public records and collections. So you can see that I have some information on the personal information and enquiries, and no public records or collections. So revolving accounts. So these air accounts that generally include a credit limit and require minimum monthly payments such as credit cards. Um, I'm not really sure what else that would be off the top of my head. But credit cards is a great example. I think so. My Bank of America card. You've got your available credit reported balance. And then this is the debt it Teoh debt to credit ratio, where they track how much you're spending as a percentage. This is a recent card, so there's not a lot of information as you can see on this one. Uh, I opened it in December, Okay? I opened it in November of 2017 and then so paid in December, and it's giving you all these details. Like, what was your high credit? What was the highest amount you've ever used in a month? Um, what is your credit limit? What is the balance? The frequency if you have, you know, any amounts past due? This is where that would be coming in. Scheduled payments amount. So they really track this, you know, very detailed level. And then have another card here with Banana Republic. You can see which I don't really use that very much. Um, with these air, you know, these are the high credit amounts with the credit limits. This is showing that I've paid off on time every month. So here paid on time 30 days past, due 60 days past due 90 days past due 120. So they all of these air going to have a different impact on your credit score. And I'm just assuming that the longer it goes out the worst. The impact is so that these air the different marks which they put on your account and then details again. Credit limit. High credit, monthly annual payment when you was opened, did it was last reported and date of last payment. And this is if you, if they were wanting to get more information, that's who they would contact. And then I had another Bank of America card, which I closed. You can see these were the balances were, um, high credit limit. I credit amounts the credit limits payment history. So paid them off all on time because I either use alerts or auto pay to make sure that I pay it everything off on time. So you have the high credit limit cried credit. The credit limit was not $500 but that was adjusted leader on because I emerged the balances between the two cards. Not that it's really that important, but so you can see here again, you know, a great level of detail. Um, And then I have another card with US bank. So I'm just gonna kind of skip through this because it's all the same. So mortgage accounts. So they show you who is the holding your mortgage. So this company send Lar Federal Savings Bank is actually not the company that I opened my mortgage with the company that I opened my mortgage would they sold my mortgage after about a month, month and 1/2 which is very common. So you have different banks which specialize in doing the getting customers, reviewing their creditworthiness and their proposal for buying a home and then issuing loans. And then they make money off of the loan origination fees, and then they go and they sell these to larger financial institutions or funds or, you know, other people that are interested in buying portfolios of mortgages, and then they get a fee around that. So instead of holding it for the 30 year, the 15 years in my case. But for 30 years, as the case may be for other people, they get their money upfront. Obviously, they're gonna get less money for it, but it's a different business model. So this is you can see while the amounts are changing over time, the amounts that I've been paying how that's changed over time. Um, it has comments on here. It's Fannie Mae account. So payment history to seven years of monthly payment history on this account so they can see so far the October to December. I've paid on time every month again because I automate this so I never mess any payments because I don't want that on my account so I could get a better credit score. And you may have noticed at the top. Now I have 757 so my credit score has gone up a bit since I got my loan. Um, you know, actual payment amount, balance, frequency, and this is the highest amount. Every liver go past that, and then the duration date opened date last reported, so the reporting date will be a little bit different for each of these, depending how each of those organization works in terms of their reporting schedule, Um, installment accounts. So I used to have student loans. That's where this came up. So auto loans would also come up here. So you having at your account number and you can see here It says clothes because I've paid this off. And this was Thea Mount How often he needs to be paid when it was opened, when it was date, last reported and date of last payment. Ah, you can also see similar leaf. I had another one, which was also closed. So again, amount paid in closed. And I'll have this as a resource that you can also look at in your own time as well. Other accounts. I don't have other accounts on file Consumer statements don't have any consumer statements on file personal information. If you used to have a different name, your Social Security number, date of birth, address, contact information, these are the different hard enquiries. So hard inquiry is inquiry that may impact your credit rating or score so And BKC Bank, the loan institution that I went with for my for my loan. Beautify federal. This is guaranteed rate, and you can see these air all within one month of each other. So they would only have an impact once, not multiple times. And then different credit card organizations, etcetera. And then you have soft enquiries that do not impact your credit rating score. So Creditkarma, um, and a number of other institutions that I'm not even really sure what it was Public records . So bankruptcies. I don't have any bankruptcies. Judgments. Um, but for bankruptcies, the constrain your credit report up to 10 years judgments up to seven years lean. So it's a legal claim on an asset, and Equifax only collects tax related leans. But again, this is 10 years. So these this is stuff that, if at all possible, you don't wanna mess around with because it stays on your credit score for a very long time . Collections. This also stays up to seven years. Unfortunately, don't have any collections dispute file information? So if any of the information here you believe is incorrect, there's three ways to launch an investigation, and the credit borough you contact is required to investigate your dispute within 30 days, but it will not remove accurate data unless it is outdated or cannot be verified. So you can find out more about disputing going through this link here, Um, and then they give you a summary of your rights under the Fair Credit Reporting Act. I'm not gonna read through this, but, um, you know, it's basically a chance for you to have, you know, familiarize yourself with that and different contacts, your rights under state law. And that's what your credit report looks like. So I hope that was of benefit to you, and I encourage you to go to the website, which I shared, and go ahead and check your credit report. 19. Home Course 5 Factor Analysis Hard Work: last part of the five factors that impact your ability to buy alone is hard work and being a savvy buyer. So I recommend taking your time, not rushing and really doing your homework. So understand the market you live in because it's easy to buy expensive homes, right? It's it's easy to do that, but it's tough to find good deals. You know, for most people, especially when you're working full time and you have, or if you have kids as well, you know, you have to figure out some time to do this, so maybe you could make it a family activity to go around and look at homes. But that's something that really takes a lot of effort to get a good feel for what? The right prices for a home. This is gonna take you a while, so drive the streets looking high and low for deals online is great, but you really need to get a feel for the neighborhood that you want to be in and get a feel for what houses are going for or what they look like and try and go and see and views Assman e properties as you can It'll just help you in terms of getting a good feel for what the prices are as we were just talking about credit scores, build it up in advance. You know, it's not a short term thing for most people you know work on its six months in advance a year in advance. It's never too early to work on your credit score. Reduce your monthly expenses and save up for your down payment and your closing costs and other expenses so that you can be in a more favorable position to buy even if you're buying the same home again like we've gone over. If you have, ah, higher down payment, that means less money that you're going to be spending every month towards interest and you're going to save thousands are up to tens of thousands of dollars and then don't rush into a purchase until you've properly vetted it, and I'll get into this a bit more later. But make sure you have contingencies in place. Make sure you're doing a home inspection and a pest inspection, and that you have all of those things checked out, Um, and then use professionals. Be prepared to pay for a thorough home inspection. Like I was just talking about to know what you're getting into before hand. You know, it's you don't want to be penny wise and pound foolish. You want to make sure that you are getting a good understanding, you know, if unless you are Ah, home inspector or you're in construction. And you really understand this. Well, you want to make sure that you know someone is looking into the roofs and seeing, you know, Are there any leaks there? Is there any mold in the home? You know, how solid is your foundation, All of these kind of things. If that's not your area of exper tastes, you know, pay the money and have someone who's qualified and experienced. Look at it. So you know what you're getting into because you don't want to skip that and then have be, you know, up for thousands of dollars of home improvements. After you move in and find out the hard way, be sure to use multiple real estate agents if it makes sense to you to scour the market for deals and they have access access to information which you don't, which is the MLS of the multiple listing service, which is where all of the real estate listings are are put up. So everything that's not for sale by owner is gonna be there and know the market. And they really know the market better than most, you know. So unless you're able to really devote a lot of time to it and even if you are, if you want to go and see a home, most of them are listed through real estate agents, so you're gonna have to work with them one way or another. 20. Home Course 5 Factor Analysis Prepaying Your Mortgage: Another thing I'd like to touch on is pre paying your mortgage down so you can potentially save thousands of dollars in interest expenses by pre paying your mortgage and the earlier in the year. Earlier in the loan, you start the better. And it can be a great alternative for people that don't feel comfortable with a 15 year loan, because that amount seems to be a little bit too much for them. But they want to pay off their home earlier. And so, if you're not fully confident in the 15 year loan, then you can make pre payments on your 30 year loan when and as you're able. But you do need to be aware that there's gonna be an approximately 1% higher interest rate , which will cost thousands to tens of thousands of dollars over the course of the loan. Just even though you're paying higher amounts on the 30 year, you're never going to be able to get the same low amount of interest typically as you would on the 15 year with similar payment levels and just for some people to understand if you're interested so mortgages are structured using an amortization schedule which breaks up the interest principal in early payments and the way that banks structure These is they used to get burned in the past so they protect against default risk. So the risk that you won't be able to repay the loan by making you pay a higher portion of the interest up front from day one. So on a 30 year loan, your interest can be 2 to 3 times your principal payment. So if you're paying $300 towards principle, you could be paying 6 to $900 towards your interest. And so this is why pre paying can be helpful, especially if you have private mortgage insurance, because that continues until you have 20%. Ah, level of home equity. 21. Home Course 5 Factor Analysis How to know if you're getting a good deal: you know, we've gone through all the steps, You've calculated your budget. You know what you can afford and what you'd like to pay. And you've started looking at homes. But how do you know if you're getting a good deal? And so this is based on basic property valuation, and there's a couple of different methods that were used and they are comparables price per square foot cost to build an income approach, and I'll go through each of these. So comparables is this is used very frequently in the industry by appraisers and other professionals. So what it is is that you're comparing a similar size and quality home that sold in the past in that area. And so you're comparing and saying All right, well, this home sold for X and my home is listed for the home that I'm interested in buying is listed for. Why? How closer those amounts. So if your neighbor's home, which looks a lot like yours, sold for $300,000 then chances are your home will be valued similarly, so just do your own comparable evaluation. You can contact your local real estate agent to find out what similar properties have sold for in the past 6 to 12 months. You can contact an appraiser and pay on appraiser to do an appraisal of the home. I didn't do this, and I don't really recommend it for most people because the bank is going to do an appraisal anyway. And you're only going to they're only gonna give you financing for the amount up to that they have appraised on. So it kind of seems like a double double stepper double cost to me because you have to pay for the appraisal that bank does. Anyway, um, you may want to do that. If you're wanting to be, you know, very thorough. You can see what the asking price is on homes in the area and keep track of them to see what they sold for. You can contact local title companies to ask for a price range that similar homes have sold for. You can also go into your county tax department, and some people report the amount that their homes sold for some people don't. So it's not an end all Beal, but it also they also have an appraisal of what the county values your home at for property tax purposes. Note that this is different than the market price, but they should be somewhat close in most situations, so price per square foot. So this is an easy methodology that allows you to compare different sized homes. So all that you're doing is you're taking the asking price and you're dividing it by the total amount of square feet of the home. So if the home includes a significant amount of property with it, you can make note of that and take into account when comparing it against other properties . But unless you're really looking at properties or land with homes for most of your process , if you're looking for something in town within city limits, typically you don't have that much of a size of a plot. So it's easier to just take the size of the home and divide it by or take the price of the home and divided by the square feet so the next one is cost to build. This is gonna take a bit more work, but you'll have to talk with a couple reputable builders in your area to understand what it would cost you to build a home with a similar size and level of quality, and they usually cost quoted per square foot. Now, depending on the fixtures and fittings, this can go from very high to very low. But if you're able to get somebody to look at the home what you're thinking about, then they can give you, ah, vague or approximate idea of what it would cost. So to compare the price per square foot, simply add the price of purchasing the land and city hookups if they're required, and then divide by the total square feet to give a price per square foot. But it is a bit more time and labor intensive. The next is the income approach. So if you live in an area with a strong rental market, you can see what you could make if you rented it out for so first, find what comparable homes with similar homes rent out for and then cost out the renter's insurance and taxes and repairs. And you can do this by contacting a insurance agent for the insurance part. If you don't already know the taxes for the property, you can get it through the real estate agent or your county tax department and then repairs . You can just use a rule of thumb amount based on your area by talking to real estate agents , property management companies or other people that have been involved in the business and then see if your rental income based on the market prices would more than cover your cost of ownership. So obviously, if you're looking at a 30 year loan versus a 15 year loan, these numbers will be very different because you're gonna have a higher monthly amount for 15 years and a lower amount for 30 years. Because it's spread out, the payments are spread out over that much more time. 22. Home Course Section 5 Intro: All right, welcome back to Section five, financing another very important section to understand. So in the financing process, you have home loan all home loan approval process and then understanding rate options and understanding loan options. So for the home loan approval process, it is consists of preparing and submitting documents, the home Purchase agreement and earnest money loan preapproval home appraisal. Then in the closing, you're gonna have a long list of waivers and final terms and conditions, and you're going to see the final cost of buying a home. And then you're gonna have a bunch of online disclosures and signatures as well as the case may be so understanding first. So let's understand rate types. So there's two main categories of home loans and those air fixed rate mortgages. And then there's adjustable rate or variable rate mortgages. So for fixed rate mortgages, this is where you fix in the interest rate at the timing of the loan, and that binds you and the bank so that you have the same rate across the life of the loan . So if interest rates go up, you do not get hit. If they do not, if they go down. You also do not benefit. Most people prefer this type of loan because of the certainty it provides that your interest rate won't jump up in the future. Now the adjustable rate mortgages is fixed for a certain period of time, and then after that it adjusts, typically on an annual basis. So for this, you benefit when interest rates go down and you pay more when they go up. So there's a couple here, couple common types of adjustable rate mortgages. So 10 slash one. It means that the interest rate is fixed for 10 years, and then it adjusts annually after that and then 75 and three, and so on. Each of those, the first number represents the period in years that the interest rate is fixed for, and then after that it's adjusting annually. And so if we want to understand what a loan estimate looks like online, so you can see that you're getting these air different loan programs for your having 15 year fixed loan thes air, the different rates and then this is your A P R, which is your interest rate and then adding in all of the different fees, etcetera, as well, and it's giving you your actual annual interest rate, and then you have your payment. So this is your prince P and eyes principal and interest. So at this rate, this is what you would be paying monthly. Um, and then this. You'll see this when you when you select the amount, right. So, depending on the loan amount, that's what's going to determine this and then lender fees. So you have in this loan it's $2680 in lender fees or it's 1.25% points. Um, and then there's a number of other examples here in terms of what the cost is, and I recommend talking with your lender to get a better understanding or toe to go into more detail of of how this works. But basically the points are amounts in terms of interest rates on the home, and it's an additional amount or a discount that will be assigned. And so here. You having a lender credit of 0.625 points so that what that means is that it's a discount for you. Um, but don't be fooled. That doesn't mean that there aren't fees that apply to it. Where they're getting you is in the higher interest rate, right? So there's a direct relation between the interest rate and the amount of fees the lower the interest rate, the higher number of fees. And I'm gonna show you a couple different sample loan estimates as well. All right, so this is the closing disclosure. Ah, but this is one. Um, so a lot of these, you know, you'll just have it in back and forth and email. So this is our flat. We have a flat fee. So some lenders have flat fees, but they're saying that they he's not charging for credit report or flood certification, etcetera. So don't know if this is a good deal or not. You really have to compare. So what you can do is then look and see. Alright. How does that compare against others? So, um, this is an itemized fee worksheet. This is not a official estimate, etcetera, so that's important to understand, but I'd like to go through this so that you can see what the different aspects are. So you're gonna have an interest rate, your type of loan, and you have your base loan amount your term, so sometimes this will be in months. So 30 years is 360 months. 15 years is half that, or 180 months sales price, total loan amount. And so he's going to give you this items required by lender to be paid in advance. So you're paying your daily interest in events, so there's a cost associated with that. Then there's reserves deposited with lender so initial deposit into escrow at $450. Then you're having homeowners insurance for two months at $60 property taxes for two months , estimated $165. So this is an estimate. It's not a finalized number because you don't have your homeowners insurance yet, So once you finalize your homeowners insurance, then you'll get an updated version of this, and then you'll have your total estimated monthly payment. So principal and interest this amount hazard insurance, real estate taxes and so your total monthly payment and then you having your total estimated funds needed to close. So you have the purchase price. You have the total estimated closing costs, said closing costs. These air all of the Associated fees to close, and then your total estimated to reserve prepaid costs. So these this is money that you're having to pay. If you see this 7 26 year, this is money that you're paying up front to the lender. So they're going to subtract that amount out, then you having your total costs and you have the loan amount, and then you have your cash deposit on sales contract, which is also another way of saying your earnest money. So you have your total credits here and then cash from bars. So this is money that you're going to have to come up with, um, at close in order if depending on what down payment that you've selected so again on this one, This is your closing costs. Is his borrower paid closing costs that borrow, that means you. So you're looking at $4522. This is your earnest money. So again, this is what your closing costs are looking like. Um, versus you know, again, this isn't a different format. Again, an email with If I had this level of credit score, this is what my interest rate would be and then And then they're saying that there their fee is just $699. Right? So and then So you can really see here that depending on the lender, the format you're going to get this information in is really all over the board. So, for example, here you're having loan type conventional fixed loan amount loan term rate, and then you're having your, uh, principal and interest payment. This is and they're charging a you a document verification fee. Some companies, some lenders might call that a loan origination fee. Um, and you have your appraisal fee again. This convey very significantly, depending on the lender, your credit TX service, flood certification, tax service fee. And notice that there's a number of fees here which are not included. That's not because they are not going to be charged to you. It's because the company that's giving you the quotation right now either felt that they didn't have enough information on hand or they didn't want to include that information at that point in time. So and you having your purchase price and we're seeing are lender third party fees of $529 and then our again our loan amount. In this situation, you have a loan lender credit and your cash to closing is this amount. Versus this is again the same company. So it's the same format. I'm not gonna go into that one again. Um, but here's another one, so you can see that I shopped around a certain amount. So this is a preapproval letter. Um, And so they're saying that if that purchase price for this loan amount, So, basically, you're the difference. Here. Is your down payment, right? The loan program, 30 year. Your interest rate. A PR term, etcetera. Your pre qualified. So that's what Another format of a prequalification letter. Um and this was the other one. 23. Home Course Section 5 Finance 2 Types of Loans: so getting back to the types of loans above and beyond the type in terms of the rate, whether it's fixed or variable or adjustable, there's government insured. And then there's conventional. So government insured loans are where government agencies into your loan toe lenders against default. And it has. They have low down payments, and they often have a mandate associated with them. So veterans and active service movie V A loan. You have rural areas or low income etcetera versus traditional loans. It's coming from a traditional financial institution like a bank, Um, and then you have varied down payments anywhere from around 5% or even a slows 3%. Perhaps, um, you know, jump to 20% and then it's market based on. There's a lot of options here. 24. Home Course Section 5 Finance Government Loans: So let's look at the government insured loans first, starting with the overview. So there's three options you have F H A, which is the Federal Housing Administration loans, and the government insures lenders against borrower default. So it's it enables you to have, ah, lower minimum down payment of only 3.5% of the home purchase price. However, it does require mortgage insurance Sorry, not private mortgage insurance but mortgage insurance and so increases the cost of the loan . The important point to note here is that private mortgage insurance goes away. Mortgage insurance does not for V A and which is from the U. S. Department of Veteran Affairs. The government insurers again, lenders against borrowed borrower default, and it covers most active servicemen and women. Unless you've been dishonorably discharged, it requires 0% down payment. You typically need a credit score of over 620 which you would need pretty much anyway. The debt to income ratio should be below 41% so your expenses on housing and then other debt payments as a percentage of your income as we went over should be less than 41% and then you needing to get a certificate of eligibility known as a CEO, we from the Department of Veteran Affairs and a number of other documents. And then you have the USDA or U. S departure of agricultural loans, which is a program for rural borrowers who meet certain income requirements. And there's a limit on the value of the home based on the area that you live in. All right. So starting with F H A loans to get the minimum down payment of 3.5% you typically need a credit score of 580 plus. Normally, you wouldn't qualify for a loan in the first place unless you had 6 20 So this is a very ah , you know, it's it's It's a great program for a lot of people, but it's not guaranteed, and in depends on your individual situation. If your credit score is between 505 79 you're going to need to have a 10% down payment again. Most people would not have access to finance. With a 500 credit score, the lender has to be FH a approved, so you need to look into that and mortgage insurance is required and is not cancel herbal. So this is going to be a cost over the course of the loan, which you're gonna have to incur. So if you go to, if you want to see it, get more information on this. Go to www dot h u d dot gov. And it tells you the different housing programs. There's a number of them, and the mission is, you know, to contribute to building and preserving healthy neighborhoods and communities, etcetera. But it's interesting to see the F. H A is the large ege mortgage insurer in the world. So and then, if you go through this and you say I want to buy a home so it's helping you figuring out how much you can afford, um, so you can know your rights and then it's telling you what kind of loans set your options are, and you can learn about the home buying programs. So this is again another resource. So telling you, you know, that they've been around since 1934. It's a very much established process where you're having low down payment, low closing costs, and it's easy to qualify um so go ahead. And it's I would recommend going to the this the website and reading through this a bit more. But if you feel like this might be a good option for you, just go ahead and call housing counselor and talk to them and they'll tell you if this matches your situation or not. So the numbers here 1 805 694 to 87 And so these this they have different councillors across the country as well. So you can also contact your state office as well. So for USDA, um, their website again, You can go just Google or use a search engine for USDA loans. And this is what the site is gonna look like. So they have a program for single family housing, direct loans. And so this is for people that have they need to have income below a certain limit for the area if they want to buy homes, so you need to be considered low income and you need to be rural, so your area should be a population of less than 35,000 people and it doesn't qualify for any year. All properties it has to generally be 2000 square feet or less, it has to be with again. It can't be more than a limit that's been put on the area. Um, probably don't have to worry about the swimming pool part, but it's and you can't rent it out. This is this. It needs to be your primary residence, and you can you can get out. You don't need to have a down payment on this, which is again huge. Um, so you having to meet the income requirements? You have to be a US citizen or qualified alien. It needs to be your primary residence. Um, so there's there's. As you can see, there's a long list of criteria I'm going to give the links to get here on. I recommend going through this again. There is, ah, research or there's Ah, a resource where you can go and talk to the people in the USDA program and see if that's something that makes sense for you or through their website. You can also get a better idea for V A Loans, which is through the U. S. Department of Veteran Affairs at W. W. About benefits stopped via dot gov backslash home loans. Um, you know, this is one of the best programs out there in terms of having, uh, no down payment. So really, you don't need any down payment to buy alone. Um, there is a lot of documentation that you need to go through, and so the process is most likely going to take you a bit longer, So you need to work with a lender that is registered to work with the V A and offer via loans. So you need Teoh to make sure you're doing that. And then when you're doing finding your home and signing a purchase agreement, make sure that the purchase and sales agreement contains a V a option clause and so you can look at what that looks like from the website here, Uh, and so there's a lot of evidence required in terms of being a getting your certificate of eligibility. So I encourage you If this is if you are an active service member or ah veteran and you're not familiar with this already, you know, it's a great resource. Talked to the department of Veteran Affairs and and figure this out, and so the way that you can do that is reach out to your nearest VA regional office with a loan guarantee operations, and so you can call them at 18778723702 and it goes on and on the website. It gives you this long list of all of the different departments. So in terms of the government insured mortgage decision tree, you know, I would start out with Are you a veteran or active service person? If yes, the V alone may be a great option if no, look at the next option. If you live in a rural area, a population less than 35,000 have a low income and are looking to buy affordable housing than the USDA may be a great option for you if you don't have very good credit and you need all the help you can get with a low down payment than the F. H. A may also be a great option for you. And if you're not able to find an option with these three, then conventional loans. But it's also good to keep in mind that if you are not able to if you're if you having issues from a credit score perspective, then you definitely will not be qualifying or what won't be able to qualify for a conventional loan if you have issues because your income is too high or the population is too high, etcetera than conventional loans are really where you need to look. 25. Home Course Section 5 Finance Conventional Loans: in terms of conventional loans like to start with the overview. So this is the option of choice for around 60% of all mortgages in the US you having down payments from 3% plus you need to have again private mortgage insurance for payments of down payments of less than 20% until your home equity reaches 20%. They have both fixed rate and adjustable rate mortgages and loan terms, typically from 10 to 30 years, and you usually gonna need a minimum credit score of 620 or higher. So let's look at 15 versus 30 year term on alone. So what are the different aspects here? So if you having a 15 year loan because it's a shorter period of time for the same amount of money, you're gonna be having to spay a higher amount, which is fixed every month. Inversely, though you're going to have a lower interest rate typically 1% lower, and you're going because you're only paying interest on 1% lower, and over a shorter period of time, you're going to have less of an interest expense, right? So this is you don't need to be as disciplined in terms of, um, putting money pre paying your mortgage in a 15 year alone because you're already paying more right. So this is good if you plan to live in your home for the longer term and play it off. So on 30 year mortgage, you're having a lower fixed monthly payment because it's spread out over 30 years. But you're gonna have a typically 1% higher interest rate, and your total interest expense is going to be higher. And you're gonna need to be a lot more disciplined in terms of managing your expenses to pay off a loan early. And it's. But it's good if you wanna have minimum monthly fixed expenses. All right, next, mortgage insurance. So private mortgage insurance is insurance for the lender required to pay required for down payments of less than 20% on the home. Again, it's You don't have to have it. Once you've reached 20%. It's highly impacted by your credit score. As far as I'm concerned, it's basically wasted money because it doesn't help you at all. It's just for the lender. Mortgage insurance is required for F H A loans and as opposed to the private mortgage insurance doesn't expire. It's an added cost over the course of the loan. All right, so where to shop for loans? Um, four government insured loans. These air the links again. I'll have them later for conventional loans. There's a lot of options anywhere from your local and national banks and credit unions to mortgage brokers. Ah, you can have online resource is like LendingTree Bankrate, Quicken loans. Um, your employer may have a tie up with a financial institution. Um, so there's really a lot of resource is here for conventional loans. 26. Home Course Section 5 Finance Lender Comparison Chart: This is a comparison chart I've made for you and I'm going to give it to you as a resource so we can see this is lender 1234 or A B C 123 X Y Z 456 So you can compare apples to apples for you know, four different lenders or more. And whether you're looking at a 15 or 30 year option, you may as well price out both so you know where you're at. But go ahead and input your purchase price. The down payment, the loan amount. As you can see, that's the same here for all of them, and then the interest rate. This is going to be different, depending on the lender. And I'm putting in actual rates that I was quoted here. Um, so your monthly mortgage payment is what that will equate to, and then your total interest expense over for 15 year and then for 30 year. And you can get this easily from an amortization calculator or spreadsheet or online, and then you're gonna have your closing costs. This is where you're really gonna want a detail and itemize everything out to get a total, and then it gives you your total cost of your mortgage, which is going to be, you know, these numbers here. So 248334 So you can really see that that even though you're buying the same cost of home, that you having a big difference here in terms of when you're looking at the total interest expense. So the the total cost here is gonna be your purchase price, plus your total interest expense, plus your closing costs, right? And so we can see all right across the different lenders. How does that work out? Well, we can see this lender here. X Y Z is the cheapest, whether I look at it from a 15 year loan perspective or whether I look at it from a 30 year loan perspective. And so if there at all easy to deal with this is you know who you're gonna be wanting to go with 27. Home Course Section 5 Finance Which Loan is Right for Me: looking at which loan is right for me. I recommend shopping for multiple loans with different lenders. Use the simple comparison chart I made for you to make sure you're not missing any important fees and make sure you get quotations on everything. Because sometimes lenders will purposefully leave out fees. Make sure you get a full estimate again. Sometimes these are left out and then check in line and online, check online and in person reviews to make sure you're working with a reputable organization. So I found some lenders online to offered very competitive rates, but they had horrible reviews, and I decided I didn't want to test my luck. So I went with a lender that I found online, who had positive reviews, and I felt comfortable with, you know, because you've put in all of this time and effort to get a home and you want to make sure your financing doesn't fall through or doesn't get delayed losing you the deal at the last minute after you've put in all this work, and so you have to start all over again and you lose at best, another 30 to 45 days at worst, you know, you might lose the home to someone else 28. Home Course Section 5 Closing Disclosure: I'd also like to show you this closing disclosure because this is really useful. So this is where you know what your final costs are. And this is what you would compare with your loan estimate. So you're alone. Estimate should give you a good idea of what these numbers are. So what is your loan term? 15 years fixed. Conventional right versus F H A R V A. So And then they go through and they tell you, And this is why it's important to have the qualified mortgage because you're getting all of these types of disclosures, right? So it's easier for you to understand the loan amount. Can this change? No interest rate. Can this change? No. Can your month old monthly principal and interest change? No. So it means you, you know, this is all fixed in. Is there a pre payment penalty? No. Is there a balloon payment? No. So these are things which you typically don't wanna have. So then we have our principal and interest and then are estimated escrow. Now, at this point, because this is a closing disclosure. We've already locked in our homeowner's insurance, and we know that this is going to be an accurate number. So you have in your estimated taxes, insurance and assessments. So, having s crew, this is where the mortgage, the lender will charge you these amounts on a monthly basis, and then they will pay the homeowner's insurance and the property taxes on your behalf so you don't have to worry about them. So it's a nice feature, so costs that closing. So you have closing costs, Which is and you there even giving you a break down here. So you having $1619 in loan costs $1860 other costs and then minus $594 in lender credits. And then this is your cash to close, including your down payment. So let's go through each of those. So you're they're charging you an origination fee or an administration fee of $275 which is very much on the low end from what I was able to see in terms of comparisons and then they break this out services. The borrower did not shop for appraisal fee credit report, flood certification, loan safe, a MERS, our registration fee tax transcript feet and verification feet. Now, I did not shop for these, but I did shop for the lender. And so I know that my appraisal fee was different here than if I go back here and look at some of the other examples that I had, Right. Um, and I know that my credit report is different. So this is something where you need to compare. And this is where choosing your lender will come in. All right, So these air services, the borrower did shop for so all of your title related fees. Right now you can choose your title company. We chose to go with this title company, and this is what the cost was. A different title company might have had the same or a different cost structure here. And so you add these amounts together, right? So this is the banks or lenders fee and then you having these air Third party fees, and then this is title company fees. And so this is the total of those and then above and beyond that, there's recording fees for the deed and mortgage. And then there's different prepaid. So the lenders make you pre pay things on you when you're doing your closing. So you having to pre pay homeowners insurance, you're having to pre pay interest, um, etcetera, and also pre paying property taxes. So you have your homeowners insurance and your property taxes, and so it gives you what you're total closing costs are minus your lender credits. Right? So that's what this number is. So then it gives you a calculating cash to close. So this was the initial loan estimate, and it changed, but it changed favorably. As you can see, it went down because they didn't really know all of the costs involved. They just used averages for the title fees. Um, or the appraisal, etcetera. Um, and then this is your down payment, right? So I'm paying 20% down, and then the deposit. This is my earnest money. And so you can see here, Um and so this adjustments and other credits, this is the amount that I'm going to have to pay for property taxes and so that we're deducting this amount from the total. That is where the owner did not own anymore. But I'm still, but so I'm gonna have to pay for the taxes. So cash to close 39,000, 100 36 cents. Right? So then this is due from the borrower at closing. So $200,885 which is made up of $278,000 for sale and then closing costs so you can see it's a bit under, you know, it's that's not quite Ah, it's around 1% basically, um, and then paid already by on behalf. So already paid the deposit and the loan amount. And so all of this is gonna get settled through escrow. And so this amount the 161,000 which is already paid on my behalf. Now I'm gonna have to come up with this amount. And so when you're going into the closing ah, well, actually, before you go into the closing, you would do a ah depends on the company. But you either do a bank transfer to the title company, or you would give them a cashier's check so that they know that it's a solid amount of money to cover that amount. So for and then it goes through on loan disclosures, which is important to understand so assumption. This loan does not allow assumption of this alone on the original terms. So if I want to sell my home later on, nobody is going to be able to assume this loan on the same original terms. Is there a demand feature which requires early repayment of the loan? No, you definitely do not want to have that. Is there negative amortization? No, this does not have that. And you do not want that partial payments. So how does the lender view partial payments in the situation? Lender may hold them in a separate account until you pay the rest of the of the payment and then apply the full payments alone. So if you only pay a partial payment and you don't pay the full amount and your past the payment date that it's gonna be in arrears, you're gonna have a late payment. And there's probably going to be penalties associated with that so escrow account for now, we'll have escrow. And so that's talking about what the property taxes are and for the homeowner's insurance as well. Um, so again, they're going through this different loan calculation. So this is why It's great to have all these disclosures. So these are the total payments. So the closing costs plus the purchase price, this is the total amount. This is what it's going to cost me to pay an interest over the course of the loans. Over. I'm doing a 15 year loans over 15 years. This is what it's gonna cost me an interest. Um, and this is the amount that's going to be financed. This is my A P R annual percentage rate, which is the cost of the loan term expressed as a rate. So this is what your interest rate is. Plus, I'm sorry. This is what your financing is when you include the other fees, etcetera. And so the total interest percentage is I'm going to be paying 26% of the value of the home over the course of 15 years in order to buy. So this is this is good information to know. Um and then, you know, for example, liability after foreclosure state may protect you from liability for the unpaid balance. So that's just good to know you have contact information here. Email phone number. We have my settlement agent here. Um, and so this is this is what you're closing? Disclosure is going to look like