changing realities in housing · changing realities in housing • rapid appreciation in early...

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Homebuyer Workshop Jayne McBurney, M.S.

Family & Consumer Sciences Agent Certified Housing Counselor

And Carolyn Bird, PhD, AFC, RFG

Associate Professor, and Family Resource Management Specialist

Changing Realities in Housing

•  Rapid Appreciation in early 2000s •  Increase in interest rates in 2005 &

2006 •  Great Recession – December 2007

through June 2009

Recent Developments in Home Buying

•  Consumer Financial Protection Bureau –  Know Before You Owe –  Re-designing Closing Disclosure Forms

•  Proposed Legislative Changes on Mortgage Deductions –  Mortgage interest deduction $96.8B /year –  Property tax deduction $24.2B / year –  Proposed 12% non-refundable on up to $500k

mortgage for primary residence only. –  Proposed 15% refundable credit capped at $25,000

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Experiences in the New Market •  Multiple Impacts

– Unable to sell out of an unaffordable mortgage

– Relocate for work – double housing costs – Among civilians – a reduced willingness to

relocate – Many military became “accidental

landlords”

Implications for Decision Purchase •  Stage of military career

– Early in career – Number of anticipated Permanent Changes

of Station remaining – Desire to go overseas – Comfortable to be an “accidental landlord” – How well do you like Peanut Butter & Jelly

Sandwiches?

Implications for Decision Purchase •  What is your Military Occupational

Specialty (MOS)? –  Can you rotate while staying at the same

installation? –  Some MOS can change Commands without a

physical relocation –  Talk to others in your MOS who are senior to you –  Remember your experience may be different

There’s no guarantee

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Special Considerations for Military Families

•  Late Career / Nearing retirement –  Is this a location you want to return to? –  Is the home suitable for renting? –  Is a short stint of being a landlord okay? – Do you prefer professional property

management? – Will your family want to stay behind?

Rent vs. Buy Advantages to Rent •  Pay less •  Little financial risk •  Cost of selling •  Ease of relocation Disadvantages to Rent •  Finding suitable rentals • No tax advantage • No freedom for individualizing space

Rent vs. Buy Advantages to Buy •  Investment of mortgage dollars •  Interest is tax deductible • Home can increase in value Disadvantage to Buy •  Commitment of time, etc. •  Ties up money • Maintenance •  Limits geographic relocation

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Can you afford a home?

Consider that most lenders suggest that 25-29% of your gross income will go to housing.

Lenders want to see less than 41% tied up in long

term debt (car loans, alimony, child support, installment loans, credit cards)

Homeowner Woes

•  …a military spouse who said her family has been separated for 4 years – partly because of deployments but also because they can’t sell their house. At the same meeting an officer told me that he is underwater on a home he bought at a previous assignment. He wondered if there were any options for him that wouldn’t ruin his credit or require a large sum of money he didn’t have.”

•  March 6, 2012, blog on Consumerfinance.gov

Real Life Experiences

•  “We can't even find a bank to do a re-fi for our VA-backed mortgage because they all want appraisals. The VA doesn't need it, but the lenders do. So, we are stuck, unable to sell and move for a better job, unable to re-finance.”

•  An excerpt of a post on CFPB

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What do lenders look at? •  Income •  Debt •  Assets •  Credit Score •  Some lenders are requiring certification

of having attended a home buyer education course

Understanding Income

Gross income vs Net Income

Before taxes and deductions ‘bring home pay’

$40,872 (2000 Census $29,428 for Johnston County)

$3406/month $2452/month

$786/wk $566/wk

Right-sizing the Payment (1)

•  Basic Allowance for Housing •  Don’t depend on other allowances –

Basic Allowance for Subsistence •  Avoid counting on other pays

– Sea Pay – Hazardous Duty Pay – And so on.

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Right-sizing the Payment (2) •  Dual-income earners

– Local economic conditions – Stability of the civilian spouse’s industry – Stability of the civilian spouse’s employer – Possibility of having children / additional

children •  Desire to stay at home •  Cost of daycare

Monthly debts

• Should be less than 15-20% of net income

• $368-490/month

Housing

25% - 33% of gross pay

$852-$1124/month

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Vehicle

•  less than 15% of gross including insurance, gas and maintenance

•  $511/ month

Family Communication •  Communicate with partner and family about spending

issues and financial goals •  Stuff happens….change in income, emergencies….

•  Goals change

•  But also….new income…SAVE IT! •  Is it worth it? - opportunity costs

Your Home Buying Professionals

• Real Estate Agent • Mortgage banker • Home Inspector • Appraiser • Attorney

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Assets/Collateral

Things you own that have value…

•  Car, vehicles •  Bank accounts, CDs , stocks •  Retirement plans, 401K, IRAs •  Life Insurance cash values, Trust funds •  Thrift Savings Plan

What is my Credit Score? Score range: 300-850

•  www.myFICO.com Use the Credit Education tab

•  www.annualcreditreport.com

Credit Score

Payment

history

Amount owed

Length of

Credit History

New Credit

Types of

Credit in Use

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How much can I buy?

Ratios help lender determine this: •  Front end: 29% of gross income

•  Back end: 41% of gross income, less monthly debt

Considering median income of $40,872

•  Front end: $988 •  Back end: $1396

-250 car payment -400 other debt

$ 746

P+I+T+I

Monthly payment = •  Principal •  Interest •  Taxes •  Insurance

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Using the lower of the two ratios:

•  Total Payment $746 less •  Real Estate Tax 85 •  Home Owner Insurance 40

•  Principal & Interest $621 use this amount to determine how much you can afford

to finance

Amortization factors

•  Determine how big of a loan you can afford, depending on interest rate and monthly payment and term of loan

•  So…considering a 30 year loan and ability to pay principal and interest of $621

How much can you afford?

•  6.00% $103,500 •  5.00% $115,000 •  4.5% $122,000 •  4.25% $126,500 •  4.00% $130,000 •  3.75% $134,000 •  3.50% $138,500

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Your Needs in housing:

•  Space, how many rooms are needed?

•  Exterior space - garage, yard, entertaining

•  Appliances •  Location •  “Rentability”

Location

•  Schools

•  Work – proximity to installation

•  Groceries, shopping areas

•  Environmental

What to expect from a Home Inspector

•  Licensed by the state. •  Realtor can make recommendations •  A home inspection is a written evaluation or report of

the condition of the home on the day it is inspected. •  Home inspectors generally evaluate: foundation,

masonry, roof, windows and doors, plumbing, electrical, heating, ventilation and air conditioning system, floor, walls, interior and exterior components

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Financial Aspects

• One - Time Costs - closing costs, moving expenses, set-up fees

• Regular costs - payments, insurance, utilities, home owners association

• Future Costs - maintenance, repairs, furnishing

Don’t become “House Poor”

•  Space out things you will need •  Be smart about furnishings, repairs, upgrades •  Making extra payments

–  Will this be the retirement home? –  Are you funding your retirement plan?

NO new purchases

•  Stop the charging elephant!

•  No new credit purchases until after closing

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Closing Statement

• Taxes • Stamps • Recording Fees • Commissions •  Inspections

What Next?

• Set up utilities • Clean the new place • Paint/repair • Plan Moving Day

– Keep kids busy!!!!

Short Term Assistance Programs

•  Armed Forces Foundation •  Provides financial support to Service

Members for everyday living expenses, home improvements, transition and career counseling, funeral arrangements, travel expenses, and family counseling service

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Short Term Assistance Programs •  American Red Cross Emergency Financial

Services for Active Duty Military Personnel •  Get emergency help for Service Members

and families, including assistance for food, temporary lodging, travel, urgent medical needs, and utility assistance.

•  Military Call Center 877-272-7337 •  Available 24/7/365

Help for Military Homeowners

•  Servicemembers Civil Relief Act •  Foreclosure Protections for

Servicemembers Receiving Hostile Fire/Imminent Danger Pay

•  DoD Homeowner’s Assistance Program

“Accidental Landlord (1)” •  Hire a property manager or do it yourself •  Establish relationships with maintenance

people and repair services •  Maintenance and fee fund (plumbing repairs,

hot water heater, tree trimming, storm sewer fees, home owners assn., etc.)

•  Vacancy fund – at least 3 months of mortgage, and utility costs. Need to climate control during extreme weather conditions.

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“Accidental Landlord (2)” •  Selling after renting

–  Military families need to live in the house for just 2 of the preceding 10 years in order to claim tax-free profit on the sale.

–  Up to $250,000 for singles –  Up to $500,000 for married filing jointly

•  See IRS Publication 3, Armed Forces Tax Guide, at http:// www.irs.gov

Homebuying: When Is the Right Time?

•  Individual / family decision •  Consider stage of career •  Future career and family plans •  Financial readiness •  State of the local economy •  Potential risks and rewards •  Do the homework – then decide

Home Buyer Ed Resources •  Presenter compiled resources

– Kiplinger's Financial Field Manual – Ohio State Univ. Homebuyers Guide – National Industry Stds for Homebuyer Ed

•  Summary of chat-box resource contributions

•  All available at learn.extension.org/events/509

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Questions?????���Ask the Extension Agent…

•  Landscape, plants •  Bugs!!!! •  Home energy savings, insulation questions, basic

maintenance •  Nutrition and Cooking questions •  Youth programs •  Jayne_McBurney@ncsu.edu, Johnston County, NC

919-989-5380 •  www.extension.org