Home Buyer’s Guide

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Ohio Department of CommerceDivision of Real Estate & Professional LicensingHome Buyer’s GuideHow to Make the Most of YourHome Buying Experience

OHIO DEPARTMENT OF COMMERCEDIVISION OF REAL ESTATE & PROFESSIONAL LICENSINGThe Ohio Department of Commerce has as its mission the promotion of safety, soundness and growth and success ofOhio businesses. The Division of Real Estate & Professional Licensing is a state agency within the Ohio Department ofCommerce. The Division licenses and regulates real estate brokers and sales associates who arrange for the sale or leaseof real estate, as well as real estate appraisers. Regulation of real estate brokers, sales persons and appraisers is intended toensure that they conduct their business in a legal and ethical manner.The laws dealing with real estate can be complicated. Frequently, problems arise simply because the parties involved donot understand the importance of each step of a transaction. The Ohio Division of Real Estate & Professional Licensing hasassembled this booklet to assist you with the home buying process. In addition, you might want to utilize the services ofprofessionals in the real estate industry. Professionals such as real estate agents, real estate appraisers, real estate attorneysand qualified inspectors can assist you with and advise you on the details of your purchase.The Division is pleased to provide the information in this booklet as a service to the general public. In addition, the Divisionoffers an online look-up service at www.com.ohio.gov which allows you to check the status of real estate agents youmay be considering. This guide is intended as general information only. The Ohio Division of Real Estate & ProfessionalLicensing does not and can not warranty or guarantee the accuracy or availability of the content of this booklet. Referencesto third parties are provided exclusively for convenience and are not and should not be interpreted as an endorsement,sponsorship or recommendation of the third party. You should consult your personal attorney, real estate or tax professionalfor details and advice on your specific situation. Should you need to verify the licensure of a real estate broker, salespersonor brokerage, or need information about filing a formal complaint with the Division, you may contact the Division at 614466-4100, e-mail at Web.real@com.ohio.gov or visit the website at www.com.ohio.gov/real.Table of ContentsThe More You Know . 2Minimize hassles with knowledge and planningWhy Buy? . 2Should You Use a Real Estate Agent? .2-3Choosing an agentHow Much Can You Afford? . 3Monthly housing budget tableGet Your Financial House in Order . 3Checking your credit reportYour Credit Rating .3-4Tips for establishing good creditFinancing Your Purchase .4-5Monthly mortgage payment tableWhere to get financingLoan pre-approvalWhat Do You Want? .5-6Things to think about as you look for your homeBuilding a new homeAttention to the Details .6-7Looking carefully at the houseDeed Restrictions, Association Fees and RulesResidential Property DisclosureStigmatized property (Megan’s Law)The Home Buying Transaction .7-9The steps to closing the dealUnconventional Purchases .9-10Short Sales and ForeclosuresLand Contracts and Rent-To-OwnEqual Opportunity in Housing . 10Helpful Checklists . 11

The More You KnowWhen buying a home, as with most endeavors, the more youknow, the easier it will be. Proper planning will help youto focus on what you want out of your real estate purchase.Furthermore, planning will help you anticipate and preparefor requests from brokers, lawyers, lenders and a host ofother professionals. This will allow you to complete yourtransaction with a minimum of hassles. (See Appendix A fora checklist.)Why Buy?It is important, first of all, to decide why you want to purchasea home. For instance, home ownership offers severaladvantages over renting. It can be an investment, comes withsignificant tax advantages, offers fixed housing expenses,gives you control over your environment and provides severalintrinsic benefits such as pride of ownership, security andindependence.Advantages of Ownership: Potential Price AppreciationTax DeductionControl Over Your EnvironmentStable Living CostsMore than just a place to live, the real value of home ownershipcomes from owning a piece of real estate that may increase invalue over time. Historically, homes appreciate in value and aprofit can be made on the sale of your home. With traditional“principal and interest” loans, each monthly house paymentyou make goes toward paying off your loan and earns you agreater percentage of, or equity in, your home. Monthly rentpayments earn you no equity and cannot later be recovered, asmortgage payments can, when you sell.This means it is important to examine a house’s potentialpayoff as well as its curb appeal. How much a homeincreases in value depends on many different things, likethe neighborhood, its age and upkeep and the strength of thehousing market. As with other investments, you may also losemoney. For example, if you only possess your home for ashort time before having to sell, your property may not haveappreciated enough to recapture your closing costs, includingany down payment you made.Currently, the federal income tax code offers severaladvantages for home owners. The biggest typically comesfrom the deduction for mortgage interest paid. For instance,if you are making a 1,000 monthly mortgage payment ofwhich 80 percent goes toward interest, you can deduct around 9,600 a year. Property taxes are also deductible as are loanorigination fees or points and house buying expenses such aslegal fees and administrative costs. Consult a tax professionalfor details.2Unlike rent, which can increase annually, most mortgageshave fixed or capped monthly principal and interestpayments. This can provide the financial security thatcomes from knowing what your housing expenses will befrom year to year. Home ownership also allows you totailor your environment to match your individual tastesand needs. Of course, this means that – in most cases –you are responsible for all of the repairs and maintenanceon the property, while if you rent, your landlord likelymaintains the property and takes care of any problems.Some home and condominium owners’ associationsmaintain shared or common areas of a development.Selecting a Real Estate ProfessionalThough no law requires the use of one, a licensed realestate agent can provide a wide range of services andadvice to assist you with the home buying process. Inaddition to finding available properties, the agent may behelpful in other ways.A good real estate agent will assist you with all the stepsof your real estate transaction. He or she will be wellacquainted with all the important things you’ll want toknow about a neighborhood you may be considering, suchas the quality of the schools, the number of children in thearea and the safety of the neighborhood. The agent cansupply information on real estate values, taxes, insurance,utility costs and municipal services and facilities.All the financial details that can seem so mind-bogglingto first-time home buyers are something the agent dealswith daily. He or she will help you figure the price rangeyou can afford, explain the advantages and disadvantagesof different types of mortgages and guide you through thepaperwork. The agent can help you prepare an offer topurchase and help with negotiations. The agent can alsobe of assistance with lining up financing and inspectionsand during the closing process.How do I choose a real estate agent? Most people choosean agent on the recommendation of family or friends. Youmay also search the Division’s website at www.com.ohio.gov/real, or contact the local Board of REALTORS forhelp finding an agent with the experience you require.The Ohio Association of REALTORS and the NationalAssociation of REALTORS each maintain websites thatalso provide a great deal of useful information. To visittheir sites, go to www.ohiorealtors.com or www.realtor.com.Once you have found a real estate agent with whom youare comfortable working, he or she, prior to conductingany business on your behalf, will provide you with aConsumer Guide to Agency Relationships. This brochureis provided to help you understand all of the possible rolesof your real estate agent in your real estate transaction.It is also intended to help you understand the role ofOhio Department of Commerce - Division of Real Estate & Professional Licensing - Home Buyer’s Guide

other agents who may be involved in your transaction.This form is required by law in the state of Ohio and doesnot in any way constitute a contract between you and theagent. Read this form carefully.How Much Can You Afford?Most lenders suggest devoting no more than 28 percentof your gross monthly income to housing expenses. Ahouse payment typically has four components: principal,interest, taxes and insurance or PITI, which are all rolledinto your mortgage. Depending upon your down paymentand the lender’s programs, you may also have PrivateMortgage Insurance (PMI) included and be required toescrow all of these components. To “escrow” means topay 1/12 of certain obligations of home ownership – likeproperty taxes, homeowners insurance, and PMI – to yourlender in your monthly principal and interest payment.The lender holds the funds in escrow until the obligation,or full payment, is due and then pays it on your behalf.The following table can give you an idea of what youmight be able to afford based on your gross income.Calculating AffordabilityAnnual Monthly 28% ofGrossGross MonthlyIncome Income Income 20,000 25,000 30,000 35,000 40,000 45,000 50,000 75,000 100,000 1,667 2,083 2,500 2,917 3,333 3,750 4,167 6,250 8,333 467 583 700 817 933 1,050 1,167 1,750 2,333Get Your Financial House in OrderSince most people, especially first-time home buyers,must finance part or all of their home purchase with amortgage, it is very important to have a good credit rating.The best loan terms are reserved for those individualswith the best credit history. The worse your credit rating,the higher your interest rates will likely be, and the morepoints you may have to pay to secure your loan.Frequently, people don’t start to think about credit untilthey are ready to purchase a home. For many, this is toolate. It is often recommended that for at least one year priorto purchasing your home, you should assure that everycredit card bill, rent and utility check, car payment andother debt is paid in full and on time. It is also a good ideato get a copy of your credit report from one or all of thethree credit reporting agencies: Equifax, www.equifax.com; Experian, www.experian.com; or TransUnion,www.transunion.com. This will let you check for anydiscrepancies and correct any errors that may have anegative impact on your ability to secure financing.Your Credit Rating Length of Credit History: Having had credit accountsfor a long time is a positive factor, because your historygives lenders information to evaluate how you typicallyuse credit and repay your debts. Credit reports withapproximately 10 years of history are considered optimal.Meanwhile, up to 7 years of credit history is consideredshort, and less than 3 years of history is considered toolittle. Credit Accounts: A high amount of previous credit isa positive factor because it indicates to lenders that otherlenders have trusted you by lending you money in the past.(Note: This is different from high credit card limits. If youare not utilizing the entire limits of your cards, reducingthe limits or your total number of cards may improve yourcreditscore.)C o n v e r s e l y,having a lowamount of creditis a negativefactor becauseit indicates thateither you arejust starting touse credit oryou have missedpayments in thepast. If you are just starting to use credit, lenders do nothave information to evaluate how you typically use creditand repay your debts. Payment History: Late or missing payments are anegative factor. Some cases are worse than others. Forexample, if you have not missed any payments recently,lenders may think you are (or have become) responsibleand do not (or will no longer) miss payments. Also,missing payments on only a few accounts is not as harmfulas missing payments on most or all of your accounts,because lenders realize that many people miss a payment(or pay late) once in a while. Also, missing a singlepayment is not as harmful as missing several consecutivepayments because many lenders consider missing 3 ormore consecutive payments as an indication that you maynot repay them. Finally, while not recommended, it isnot as harmful to miss payments on accounts with lowbalances as it is on accounts with high balances becauselenders stand to lose less money on low balances if theyremain unpaid.Ohio Department of Commerce - Division of Real Estate & Professional Licensing - Home Buyer’s Guide3

Credit Usage: High balances are a negative factor(except for some types of installment loans such asmortgages and auto loans), because lenders worry thatyou are living beyond your means and may not be able torepay them. This is particularly true with credit card debt.Lenders do evaluate how much you owe (your debt) inrelation to how much you earn (your income). Meanwhile,low balances are a positive factor because lenders seeevidence that you tend to use credit conservatively so theydo not stand to lose too much if you become unable torepay them. Never using your credit cards, however, maybe considered a negative factor. First, it does not providelenders with information about how you typically usecredit and repay your debts. Second, it also means thatyou have a lot of available credit, which you may decideto use if you experience financial trouble. Credit Applications: When you apply for any typeof credit (such as a mortgage, auto loan, credit card,department store card, etc.), the lender considering yourapplication checks your credit history, and it is notedon your report as an “inquiry.” Although inquiries are anatural result of applying for credit, lenders dislike seeingmany within a short period of time. This is because itis hard for them to determine whether you are applyingwith different lenders in search of the best offer or if youare trying to obtain credit because of financial trouble.Remember, making many applications in a short periodof time could hurt your credit score. Therefore, try tolimit your comparison to a small number of lenders when“shopping” for the best offer.Financing Your PurchaseNearly 90 percent of home buyers finance their purchase.That means virtually all buyers require some sort of loan.The real issue with real estate financing isn’t getting aloan (virtually anyone willing to pay lofty interest ratescan find a mortgage). The issue is getting the loan that isright for you – one with the lowest cost and best terms.The vast majority of home loans are secured with amortgage. A mortgage makes the home itself the securityfor the loan. The buyer receives the deed from the seller,and so becomes the legal owner, but the buyer gives thelender the right to take possession of the house in the eventthe buyer defaults on the loan. There are several types ofavailable mortgage options, which your agent can assistyou with. Following are some terms to be familiar with. Loan Term: The life, or length of a mortgage is typically30 years, but 15 and 20-year loans are also available. Alonger term means a lower monthly payment but highertotal interest paid.the lender a sum of cash called a down payment to reducethat amount. Interest: Usually expressed as a percentage called theinterest rate, interest is what the lender charges you to usethe money you borrow. Annual Percentage Rate (APR): The yearly cost of amortgage, including interest, mortgage insurance, and theorigination fee (points), expressed as a percentage. Point(s): Additional loan costs are often expressed inpoints. A point is one percent of the financed amountof the loan. These costs are generally rolled into yourmortgage payment. Fixed-Rate Mortgage: With a fixed-rate mortgage, yourinterest rate stays the same for the term of the loan. Yourprincipal and interest payment remains stable, making iteasier to plan a monthly budget. Initial interest rates tendto be higher than with other types of loans, but protect youfrom the risk of rising interest rates. Adjustable-Rate Mortgage: ARMs usually offer alower initial interest rate than do fixed rate loans, butyour rate and payments can go up or down, depending onwhich way interest rates in general are going. Private Mortgage Insurance (PMI): Lenders typicallyrequire a down payment of 20 percent. If your downpayment is less than 20 percent, your lender considersyour loan riskier than those with larger down payments. Tooffset that risk, lenders will need the mortgage guaranteedby an outside organization such as the Veteran’sAdministration, the Federal Housing Administration or aprivate mortgage insurer. This protects the lender againstany mortgage defaults. Without it, many buyers could nototherwise afford to buy a home. You can usually cancelyour PMI when your equity in you home reaches around20 percent. Ask your lender for complete details. Good Faith Estimate: Approximate dollar amounts (ora range of amounts) of all the charges, costs, and fees aprospective home buyer will have to pay at closing on aparticular property. Mortgage financing can be obtained from mortgagebankers, mortgage brokers, savings and loan associations,mutual savings banks, commercial banks, credit unions,and insurance companies. To apply for a loan youmust complete a written loan application and providesupporting documentation such as pay stubs, tax returnsand rental checks. Principal: This is the sum of money borrowed to buyyour home. Before the principal is financed, you can give4Ohio Department of Commerce - Division of Real Estate & Professional Licensing - Home Buyer’s Guide

Per-Month Payments (Based on a 30-Year Fixed Loan – Principal and Interest Only)*Loan Amount 50,000 60,000 70,000 80,000 90,000 100,000 110,000 120,000 130,000 140,000 150,0003.25% 218 261 305 348 392 435 479 522 566 609 6533.5% 225 269 314 359 404 449 494 539 584 629 6744% 239 286 334 382 430 477 525 573 621 668 7164.5% 253 304 355 405 456 507 557 608 659 709 7605% 268 322 376 429 483 537 590 644 698 752 8056% 300 360 420 480 540 600 660 719 779 839 8996.5% 316 379 442 506 569 632 695 458 822 885 9487% 333 399 466 532 599 665 732 798 865 931 998*Check with your lender for a full list of estimated closing costs and accurate payment information.The table above details what you could expect to payper month for a given loan amount at the given interestrate. This table is based on a 30-year term and, as noted,reflects principal and interest only. Should I be pre-approved for a loan? Before youbegin to make offers on properties, it might be in yourbest interest to get pre-approved for a loan. Pre-approvalmeans you have met with a loan officer, your credit fileshave been reviewed and the loan officer believes you canreadily qualify for a given loan amount with one or morespecific mortgage programs. Based on this information,the lender will provide a pre-approval letter, which showsyour borrowing power.Although it is not a final loan commitment, the preapproval letter can be provided with an offer to purchaseto assure the listing agent or seller of your ability to securefinancing. This is important because sellers do not wantto accept an offer that is lik

The Division licenses and regulates real estate brokers and sales associates who arrange for the sale or lease of real estate, as well as real estate appraisers. Regulation of real estate brokers, sales persons and appraisers is intended to . Once you have found a real estate agent with whom

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