Evaluating Housing Alternatives

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Section 34.1
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Chapter
Buying a Home
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Section 34.1 Evaluating Housing Alternatives
Section 34.2 The Home Buying Process
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What Youll Learn

• How to compare the advantages and disadvantages
  of buying a home (p. 730)
• How to determine the amount of down payment you
  will need and the approximate amount you can
  borrow to buy a home (p. 730)

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What Youll Learn

• How to describe various types of home ownership
  (p. 733)

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Why Its Important
Being able to evaluate housing alternatives will
help you to decide whether to purchase a home.
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Legal Terms

• mortgage (p. 730)
• equity (p. 730)
• debt ratio (p. 731)
• cooperative (p. 735)
• condominium (p. 735)

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Section Outline
Deciding to Buy a Home
Advantages to Home Buying Disadvantages to Home
Buying How Much Can You Afford?
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Section Outline
Types of Home Ownership
Single- and Multifamily Homes Mobile
Homes Cooperatives Condominiums
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Pre-Learning Question
What do you do before deciding to buy a home?
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Deciding to Buy a Home
Buying a home may be the most important purchase
you will ever make.
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Deciding to Buy a Home
You will need to

• weigh the advantages and disadvantages
• consider how much you can afford
• determine the type of house will best fit your
  needs

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Deciding to Buy a Home
Most people take out a mortgage to help with the
costs. A mortgage is a written instrument by
which the buyer (the mortgagor) pledges real
property to the lender (the mortgagee) as
security for a loan.
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Advantages to Home Buying
There are several advantages to buying a home.
One is the ability to do with it as you wish
without having to answer to another owner.
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Advantages to Home Buying
Another advantage is the increase in equity, or
the difference between the fair market value and
the mortgage, in the property. Equity increases
as you pay off the mortgage and as the property
increases in value.
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Advantages to Home Buying
A third advantage is that you can deduct property
taxes and interest paid on your mortgage from
your income tax return.
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Disadvantages to Home Buying
There are some disadvantages.

• the inconvenience and cost of upkeep
• the inability to move easily and quickly if
  necessary

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How Much Can You Afford?
To determine how much you can afford to pay for a
house, you must consider

• the amount of down payment
• the amount you can borrow based on your income
  and expenses

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Down Payment
Down-payment requirements range from zero to 30
percent of the purchase price.
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34.1
Down Payment
Type of Loan
Down Payment
Veterans Administration (VA) loans (for
qualified veterans to buy a house up to 203,000)
0 percent
Mortgages backed by federal agencies, such as
Fannie Mae and Freddy Mac
3 percent
3 to 5 percent
FHA loans (loans insured by the Federal Housing
Administration)
10 to 30 percent
Conventional bank loans
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Loan Qualifications
A lender will judge your ability to repay your
loan based on your credit report and your debt
ratio, or the amount of your monthly payments
compared to your monthly income.
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Loan Qualifications
Your mortgage payment, including taxes and
insurance, should not exceed 28 percent of your
monthly gross income.
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Loan Qualifications
Total monthly debt payments (including your new
mortgage, credit cards, car payments, and so on)
should not exceed 36 percent of your income.
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The Elements of Buying a House
Its important to consider the following issues
when making a home purchase.

• location
• down payment
• mortgage rates and points

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The Elements of Buying a House

• closing costs
• monthly payments
• maintenance costs

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Pre-Learning Question
What are some different types of homes a person
can own?
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Types of Home Ownership
You have many choices in selecting a home,
depending on how much you can afford and the
desired size of the house and its location.
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Types of Home Ownership
Different types include

• single-family homes
• multifamily homes
• mobile homes
• cooperatives
• condominiums

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Single- and Multifamily Homes

• Single-family homes are the most popular type of
  home.
• They offer privacy and more overall usable space
  than other types of housing.

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Single- and Multifamily Homes

• Multifamily dwellings are less expensive to own
  because of the income from nonowner-occupied
  units.
• The owners monthly mortgage and tax payments can
  often come from rental income.

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Mobile Homes

• Mobile homes are also known as manufactured
  homes.
• They are less expensive to purchase and to keep
  up.
• They usually can be sold quickly and easily.

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Cooperatives
A cooperative (co-op) is a form of home ownership
in which buyers purchase shares in the
corporation that owns an apartment building and
holds the mortgage on it.
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Cooperatives
Shareholders have a proprietary lease that gives
them the right to the individual units.
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Condominiums
In a condominium (often called a condo), each
owner has an absolute individual interest in an
apartment unit and an undivided common interest
in the common areas of the condo project.
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Match the type of home with its description.

1. Multi-family home
2. Cooperative
3. Condominium
4. Mobile home

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1. A situation in which each owner has an absolute
   individual interest in an apartment unit and an
   undivided common interest in the common areas.

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1. A situation in which buyers purchase shares in
   the corporation that owns an apartment building
   and holds the mortgage on it.

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1. Also known as a manufactured home

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1. Less expensive to own that a single-family home
   because of the income from nonowner-occupied
   units.

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ANSWER

1. Multi-family home (d)
2. Cooperative (b)
3. Condominium (a)
4. Mobile home (c)

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Section 34.1 Assessment
Reviewing What You Learned

1. What are the advantages and disadvantages of
   buying a home?

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Section 34.1 Assessment
Reviewing What You Learned
Answer
Advantagesthe ability to do with it as you wish
equity build up ability to deduct property taxes
and interest paid on your mortgage from your
income tax return.
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Section 34.1 Assessment
Reviewing What You Learned
Answer
Disadvantagesthe inconvenience and cost of
upkeep and the inability to move easily and
quickly.
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Section 34.1 Assessment
Reviewing What You Learned

1. Is it possible to buy a home with no down
   payment? Explain your answer.

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Section 34.1 Assessment
Reviewing What You Learned
Answer
Yes. Qualified veterans can obtain a VA
(Veterans Administration) loan to buy a house up
to 203,000 with no down payment.
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Section 34.1 Assessment
Reviewing What You Learned

1. Describe the five types of home ownership.

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Section 34.1 Assessment
Reviewing What You Learned
Answer
(1) Single-familyoffer the most privacy and
usually have more usable space than other types
of house. (2) Multi-familyare less expensive to
own because of the income from nonowner-occupied
units.
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Section 34.1 Assessment
Reviewing What You Learned
Answer
(3) Mobile homesalso known as manufactured
homes, are less expensive to purchase than
ordinary houses and cost less to keep up. They
can usually be sold quickly and easily.
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Section 34.1 Assessment
Reviewing What You Learned
Answer
(4) Cooperativesbuyers purchase shares in the
corporation that owns an apartment building and
holds the mortgage on it.
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Section 34.1 Assessment
Reviewing What You Learned
Answer
(5) Condominiumseach owner has an absolute
individual interest in an apartment unit and an
undivided common interest in the common areas of
the condo project.
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Section 34.1 Assessment
Critical Thinking Activity Lender Criteria
If you were planning to borrow money to buy a
home, why would your employment history be
important to a lender?
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Section 34.1 Assessment
Critical Thinking Activity Answer Lender Criteria
Answers will vary, but should include that a
lender will want to judge your ability to repay
your loan based on different criteria such as
your employment history, credit report, and your
debt ratio.
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Section 34.1 Assessment
Legal Skills in Action Calculating the Down
Payment
Using the following scenarios, determine the down
payment required on a house that costs 203,000.
(Assume all other costs are already included.)
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Section 34.1 Assessment
Legal Skills in Action Calculating the Down
Payment

• VA loan to a qualified veteran
• Fannie Mae loan 3 percent
• FHA loan 4.5 percent
• Conventional loan 15 percent

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Section 34.1 Assessment
Legal Skills in Action Answer Calculating the
Down Payment

• VA loanno down payment
• 3 percent loan203,000 x .03 6,090
• 4.5 percent loan203,000 x .045 9,135
• 15 percent loan203,000 x .15 30,450

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End of Section 34.1