A Better Rule To Follow
Lets be brutally honest for a second: these are confusing times. The 2008 recession and the market crashes at the start of the pandemic has everyone constantly on edge about their finances. Couple that with surging housing costs and the majority of jobs doing whatever they can to pay employees as little as possible, its easy to be bleak about financial future.
Rather than let the 30% rule automatically disqualify you from buying a home, take matters into your own hands. After all, your personal situation will be different from everyone elses. Even if your income is the same as someone else, that doesnt mean you have the same expenses.
An easy example is that someone who doesnt own a car could have a few hundred extra dollars every month to put towards a mortgage payment, instead of making car payments. Or someone who is willing to live with roommates will have different calculations than someone who is living alone. In short, create a detailed budget that sets aside a reasonable percentage of your income for housing costs regardless of what percentage it is.
Things That Don’t Stay With The Home You Are Buying
Elizabeth Weintraub is a nationally recognized expert in real estate, titles, and escrow. She is a licensed Realtor and broker with more than 40 years of experience in titles and escrow. Her expertise has appeared in the New York Times, Washington Post, CBS Evening News, and HGTV’s House Hunters.
The Balance / Sabrina Jiang
Are you counting on key features on a home youre purchasing? Fixturesor items physically attached to the hometypically stay with the house. Unfortunately, theres often confusion as to what qualifies as a fixture, and some buyers may find their favorite items removed from the home upon move-in.
Heres how to tell whether theyre fixturesand whether they’re included with the sale.
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But how does it work? Borrowers must provide a quote from a contractor, before closing on the house, which is then submitted to both the mortgage lender and CMHC for approval. In order to do this, you must add a condition in your Agreement to Purchase that says you want a contractor to inspect the home before closing. The contractor will provide a quote that breaks down the scope of work and the costs associated with it. Once both CMHC and the lender approve the improvement amount, it is added to the mortgage loan.
On closing day, the improvement amount is advanced to your lawyer, who will hold onto it until the renovations are complete â this means that you donât actually get the money until the work is done, so we recommend that our clients have access to an unsecured line of credit so that the initial deposits/costs can be paid and work can begin. When the renovation is complete, the lender sends an appraiser to your home, to confirm that the scope of the work outlined on your quote is done. Once confirmed, the lender will authorize your lawyer to release the improvement amount to you.
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Not Hiring A Real Estate Agent
Trying to search for a home on your own is time-consuming and complicated. A professional, experienced real estate agent can help you narrow down your choices and spot issues . Some states require a real estate attorney to handle the transaction, but attorneys wont help you search for a home they can help you draft an offer, negotiate the purchase agreement, and act as a closing agent.
Also, if you go on showings without your own real estate agent, a sellers agent might offer to represent you. This can be dicey because that agent doesnt have your interests in mind their goal is to get the highest and best offer for the seller. Having your own agent whose interests are more aligned with yours will help you make more informed choices.
Best of all, the cost of enlisting an agent wont come directly out of your pocket. As a buyer, you generally dont pay the buyer agents commission. Its usually paid by the seller to the sellers agent, who then splits the commission with the buyers agent.
Appliances And Fha Lending Standards
You may not object to buying a home without basic kitchen appliances, but FHA lending standards insist that a new owner move into a home that is functioning and sound. This relieves the owner from undergoing huge expenses and perhaps going into foreclosure, with the lender suffering another financial loss. The lack of these appliances affects the worth of the home and in turn, affects the amount of the mortgage the lender is willing to give.
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How Much Does It Cost To Repair Kitchen Appliances
Angies List reports that typical electrical kitchen appliance repairs can cost as much as $2,000. In a drastic scenario like that, you might as well just buy a new refrigerator or stove. When your house is on the market, the last thing you want to worry about is fixing leaky faucets or repairing the dishwasher.
Things To Know About Fha 203 Loans
The FHA works with its network of approved mortgage lenders for providing mortgage loans originated under FHA mortgage lending programs. FHA 203 funds for renovation are held in escrow by the mortgage lender until approved for release by an FHA property inspector. Borrowers of FHA loans are required to pay an up-front mortgage insurance premium at closing and also pay annual mortgage insurance premiums that are prorated monthly and added to monthly mortgage payments. Contact FHA-approved mortgage lenders for details about FHA 203 loans, mortgage quotes and for applying for an FHA 203 mortgage loan.
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Budget For What You Need And Do It Before You Move In
First-time home buyers can be surprised by all the little expenses the landlord used to cover, from new screens and paint to water bills and appliances. If you dont plan ahead, you might be in hot water soon. Oh, unless the hot water heater breaks and you cant afford a new one.
Find out which appliances you need to buy and which ones youll keep. As for the ones that come with the house, do a little research and see how soon you might need to replace them. You might want to live with your old sofa for a while longer if a new dishwasher is on the horizon.
Its Perfectly Normal To Be Excited About Finally Purchasing The Home Youve Always Dreamed Of
Now youre ready to ditch the hand-me-down furniture youve used for years and pick up that new matching bedroom set. Theres only one problem. Your mortgage loan hasnt closed yet. Its common to think that buying a few pieces of new furniture is OK as long as youre not paying any interest or dont have to make any payments until after your mortgage loan closes.
Unfortunately, even with 0% financing and no payments until the following year, the furniture store is still going to run your credit, which could cause a temporary drop in your credit score.
New federal regulations require mortgage lenders to run a borrowers credit again right before closing, even after the loan has already been approved. If you were close to the credit limit for your particular rate, simply buying that new furniture before your mortgage loan is closed could be enough to cause your loan not to close on time with the rate you wanted. Likewise, taking on new scheduled debt payments regardless if youre paying interest or not could affect your debt-to-income ratio. If your ratios were close, the extra payments could cause you to no longer qualify or at the very least, delay your closing.
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Can You Include New Appliances In A Mortgage
A refrigerator, washer and dryer set and other appliances may be included in a home sale, but if theyre not, ask for them. In most home purchases the buyer is obtaining a mortgage to purchase the home, she says. Those mortgage underwriters dont like to see personal property negotiated in the sale of a home.
Does The Fha Require Appliances In A Property For Their Mortgages
- Does the FHA Require Appliances in a Property for Their Mortgages?
Getting an FHA-backed Mortgage
What is the FHA? It is a federal entity that helps mortgage lenders give loans to people with lower or moderate incomes.
When you buy a property, there is a good chance your mortgage will be backed by the Federal Housing Administration. To get an FHA-backed loan, certain requirements such as income, location of house, and appliances must be met.
Does FHA Require Appliances in a Property?
Yesbut, not exactly. The FHA wants to ensure appliances, such as ovens and ranges, refrigerators, and dishwashers, can be properly installed and supported by the homes utilities. To determine this, a home inspector can help.
Why request a Home Inspection?
A reputable home inspector can determine if the utilities in a home are installed and work properly. A mortgage lender, such as Shamrock Home Loans, can quickly recommend qualified and experienced home inspectors. If a property needs maintenance, you, as the buyer, can use the inspectors findings as leverage in negotiations with the seller.
Appliances and Home Price
The FHA requires all appliances included in the sale to be added to the homes market value. As the buyer, you may need to negotiate with the seller to keep the appliances. If installing your own, arrange for the seller to take their appliances. Whatever the case, the homes utilities need to be free of defects and be up to code before the sale can take place.
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Is The 30% Rule Too Black And White
Financial experts suggest that there is a income sweet spot, where the 30% rule makes sense. However, for those making minimum wage , youre going to almost be forced to spend way more than 30% on a place to live. On the other hand, those who make strong six-figure incomes can likely find suitable housing for much less than 30% of their income.
Those with higher salaries can also safely splurge on housing, since the remainder of their income should more than cover the rest of their expenses. In todays modern world, many experts are moving away from the 30% rule. Its just too rigid to be a one-size-fits-all rule. Everyones financial situation is a bit unique, after all.
Applying For Credit Before The Sale Is Final
One day, you apply for a mortgage. A few weeks later, you close, or finalize, the loan and get the keys to the house. The period between is critical: You want to leave your credit alone as much as possible. Its a mistake to get a new credit card, buy furniture or appliances on credit, or take out an auto loan before the mortgage closes.
Wait until after closing to open new credit accounts or charge big expenses to your credit cards.
Heres why: The lenders mortgage decision is based on your credit score and your debt-to-income ratio, which is the percentage of your income that goes toward monthly debt payments. Applying for credit can reduce your credit score a few points. Getting a new loan, or adding to your monthly debt payments, will increase your debt-to-income ratio. Neither of those is good from the mortgage lenders perspective.
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Within about a week of the closing, the lender will check your credit one last time. If your credit score has fallen, or if your debt-to-income ratio has gone up, the lender might change the interest rate or fees on the mortgage. It could cause a delay in your closing, or even result in a canceled mortgage.
How to avoid this mistake: Wait until after closing to open new credit accounts or to charge furniture, appliances or tools to your credit cards. Its OK to have all those things picked out ahead of time just dont buy them on credit until after you have the keys in hand.
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Do You Have To Buy New Appliances When Buying A New House
Many of us just dont have thousands of dollars to spend on new appliances especially for those preparing to buy a new house and move. If you simply cant afford new appliances, this should be a moot point. As well discuss shortly, there are plenty of improvements you can make that can increase your homes appeal without breaking the bank.
Can You Add Renovation Costs To Your Mortgage
Editors Note: This blog post was originally published in April 2018 and has been revised to reflect industry updates.
As the real estate market continues to experience record-low mortgage and interest rates, higher-than-average prices, and bidding wars, many prospective buyers could become frustrated.
This is especially challenging with many sellers receiving higher-than-ask, multiple offers. WIth competition heating up even in moderately priced regions, another option is pursuing a home renovation or remodeling project.
While the most conventional route is a move-in ready or new construction home, other options include fixer-uppers or rehab properties. With both requiring more upgrades, repairs and maintenance, purchasing a home that needs work could be the ticket to your customized dream home.
Despite these advantages, some consumers are still hesitant due to uncertainty regarding project scope and affordability. Many often wonder: Is there a way to add renovation costs of my new home to a mortgage?
The short answer is: Yes.
While youll likely have additional questions, its best to contact a reputable lender, such as Contour Mortgage for guidance when choosing the right rehab loan for your project.
Lets review the benefits, requirements, and pros and cons of each rehab loan offered through Contour Mortgage.
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Not Checking Credit Reports And Correcting Errors
Mortgage lenders will scrutinize your credit reports when deciding whether to approve a loan and at what interest rate. If your credit report contains errors, you might get quoted an interest rate that’s higher than you deserve. That’s why it pays to make sure your credit report is accurate.
How to avoid this mistake: You may request a free credit report each year from each of the three main credit bureaus. You may dispute any errors you find.
Can You Add Renovations To A Mortgage When Purchasing
Residential mortgage loans typically are approved based on the appraised value and condition of the property being financed. Mortgage lenders generally require any renovations to be completed before a mortgage loan can be approved and closed. The Federal Housing Administration 203 loan program provides an “all-in-one” mortgage loan for purchasing or refinancing a home and renovating it based on the property’s appraised as-repaired value.
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Is The 30% Rule Outdated
You dont have to wonder around too many financial blogs to find articles suggesting the 30% rule is obsolete. The housing prices or rental costs have skyrocketed to unbelievable levels in recent years. Many people no longer find it possible to limit their housing budget to just 30% of their income. If you run the numbers and realize you have no shot at sticking to the 30% rule, what can you do?
Well, you can ignore it. The rule has its origins in public housing regulations from the late 1960s. Those regulations capped rent for public housing at 25% of the residents income, which was raised to 30% in the early 80s. Of course, the economy of the 70s and 80s was a lot different than the economy of today. These days, young home buyers are likely to be carrying tons of student debt and working jobs where wages havent even been close to keeping up with inflation.
What Are You Comfortable With
Ultimately, it has to be about what you are comfortable with in your own finances. Personally, my housing costs are under 20% of my monthly income. I can stay comfortable with my housing costs hovering that 20% mark. We were actually closer to the 30% mark when I bought my first house. I wasnt very comfortable with that at all. It made budgeting for everything else quite tricky.
When deciding how much of your income should go towards housing expenses, its important to consider your own situation. Its also worth thinking about what would happen if your situation changed. How stable is your job? Are you the sole breadwinner in the house? Or if there another income to rely on? Do you have multiple income streams? What will your finances look like if you was laid off?
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Why Bother With Fha Financing
For many homebuyers, FHA financing is the path to homeownership taken by many first-time homebuyers. Its low downpayment requirements, currently at 3.5 percent of the purchase price, and lower credit score requirements mean more people can afford to buy a home. Of course there are limitations to the lending criteria and not all are buyer-friendly. Mortgage insurance payments for the life of the loan are required, and while a buyer isn’t required to have a home inspection, they strongly suggest one.
Beware These 5 Hidden Costs Of A New Construction Home
If youre ready to buy a home, you may be on the fence about whether to choose an existing property or build something from scratch. Going the new construction route has its perks its move-in ready, all the appliances, cabinetry and flooring are virtually untouched, you can tailor the floor plan to your needs but there are also some downsides. One of them can be the cost. If youre not factoring the following five expenses in, you may end up with a bad case of sticker shock when its time to sit down at the closing table.
Looking to buy a home? Find out how much house you can afford here.
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