Apply What Youve Learned - Buying a Residence

Scenario: You are a single 30-year-old with a gross annual income of $30,000. You have been renting an apartment, but you are tired of the rules set by your landlord. You would like a place that you are free to fix up the way you want it. You are considering both condominiums and single-dwelling homes and are looking at the pros and cons of owning each type of housing. You would like to begin the home-buying process as soon as possible. You have $25,000 saved for a down payment, much of which was recently inherited from your late great aunt, and your family is willing to give you an additional $15,000. You are currently repaying a school loan, a car loan, and some credit card debt. Current interest rates with home lenders are averaging around 5.0% at this time.

Owning a residence is often less expensive than renting a comparable property in the long term. Which of the following reasons may explain this phenomenon? Check all that apply.

The gain realized from the sale of a residence is tax-exempt income under certain conditions.

Rent is generally less than a mortgage payment.

Tax deductions for lease payments often partially offset the cost of housing.

Property values often appreciate over time.

The first step in the process of home buying is to:

Prequalify for a mortgage with a reputable lender

Agree to terms with a seller

Get your finances in order

Obtain a mortgage loan

In order to get your finances in order, you should:

Do all of these

Ensure that your credit bureau file is accurate.

Estimate your expected monthly housing costs.

Adjust your budget to fit the costs expected.

Given your financial condition above and the desire for a 30-year fixed-rate mortgage that requires a 20% down payment, use the 28% front-end ratio to identify the amount of the monthly payment necessary to cover the loans principal, interest, taxes, and homeowners insurance, as well as the gross annual income required to qualify for the loan.

A table that may be used to facilitate this analysis follows. Remember that for each home price-interest rate combination, the upper number reflects the monthly payment and the lower number indicates the borrowers required annual income.

Price of home /	$120,000	$150,000	$180,000	$210,000	$240,000
Interest rate
3.0%	555	693	832	971	1,109
	23,800	29,700	35,700	41,600	47,500
4.0%	608	760	912	1,064	1,217
	26,100	32,600	39,100	45,600	52,100
5.0%	665	832	998	1,164	1,331
	28,500	35,700	42,800	49,900	57,000
6.0%	725	907	1,088	1,269	1,451
	31,100	38,900	46,600	54,400	62,200
7.0%	789	986	1,183	1,380	1,577
	33,800	42,300	50,700	59,200	67,600

Given your financial situation and the table above, you should be able to qualify for a home that costs between and . If purchased, your loan would require monthly payments of .

If you select a mortgage loan offer that requires a down payment of less than 20%, the lender will most likely require you to:

Make a balloon payment

Purchase a home warranty policy

Purchase private mortgage insurance

Find a cosigner for the loan

The estimated monthly payments for a single-family dwelling typically include the transactions

loan principal and interest only (PI)

loan principal and interest and property taxes (PIT)

loan principal and interest, property taxes, home insurance, and realtor fees (PITIR)

loan principal and interest, property taxes, and homeowners insurance (PITI)

In contrast, the estimated monthly payments for a condominium typically include the transactions

Loan principal and interest, property taxes, home insurance, and realtor fees (PITIR) plus any homeowners association fees

Loan principal and interest plus any homeowners' association fees

None of these

The same elements as that required in the purchase of a single-dwelling house

Homeowners' association fees for a condominium unit cover all costs except

the upkeep of amenities such as the pool, tennis courts, gym, and clubhouse

management and upkeep of the common grounds and outside of the buildings

insurance on your personal belongings within your unit

insurance on your building

Lenders use the ratio to compare a borrowers total monthly debt repayments (including the prospective loans PITI payment and any auto, credit card, or other debt obligations) to his or her gross (pre-tax) monthly income. For most reputable lenders, a ratio of or less is desirable, and according to current legislation, the ratio cannot exceed for a qualified mortgage.

If you dont want the $15,000 of additional savings available from your family to affect your back-end ratio, then a lender may require:

A gift letter that says that the funds are truly a gift to the borrower and are being distributed from the borrower's own funds

That you refuse the gift or the loan of the money

None of these, as this help from your family will not affect your back-end ratio

That the terms of the loan be put in writing

If you need to improve your back-end ratio, you can: Check all that apply.

Reduce the down payment on your new home

Increase your monthly gross income

Stop paying your student loan

Pay down or pay off your existing credit card debt

Choose a home in a higher price range