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BYU Student Alumni Conference

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BYU Student Alumni Conference Buying a Home February 25, 2012 Bryan Sudweeks, Ph.D., CFA. From the Marriott School of Management s Personal Finance: Another ... – PowerPoint PPT presentation

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Title: BYU Student Alumni Conference


1
BYU Student Alumni Conference
  • Buying a Home
  • February 25, 2012
  • Bryan Sudweeks, Ph.D., CFA.
  • From the Marriott School of Managements
  • Personal Finance Another Perspective web site
    at
  • http//personalfinance.byu.edu
  • from lessons on Understanding Credit
  • Understanding Consumer and Mortgage Loans, and
  • The Home Decision

2
Abstract
  • Buying a home is for most the single largest
    purchase for most families and individuals. Yet
    many put the same effort into buying a home as
    they would into buying a camera or TV. You
    should spend significantly more time in the home
    buying process as it will save you significant
    amounts of money in the long-run. This
    presentation gives suggestions where most of that
    research and time should be spent. I discuss
    what our leaders have said about buying a home,
    the risks of home ownership, and a four step
    process for buying a home. My advice is to follow
    the prophet who counseled us on what his father
    said Buy a modest home, make it beautiful, and
    pay off the mortgage as quickly as possible.

3
Definition
  • House a hole in the middle of the yard that
    you pour money into.

4
Objectives
  • A. Understand what our Leaders have said
    regarding buying a home
  • B. Understand risks in home ownership
  • C. Understand the Four-Step Process for Buying a
    Home
  • Step 1. Understand your limits
  • Step 2. Find your home
  • Step 3. Negotiate your loan
  • Step 4. Enjoy home ownership

5
Understand what our Leaders have said Regarding
Buying a Home
  • We must have a correct perspective on finances.
    It is based on four key principles
  • 1. Ownership Everything we have is the Lords
  • Things we have are not ours but on loan
  • 2. Stewardship We are stewards over all God
    shares with us
  • We must learn to be better stewards
  • 3. Agency the gift of choice is a wonderful
    gift
  • We must used that agency wisely
  • 4. Accountability We will be held accountable
    for all our choices in life
  • We must make the best choices we possibly can as
    we will be held accountable for them

6
Our Leaders Counsel (continued)
  • We have received wise counsel on the subject of
    buying a home
  • President James E. Faust stated
  • Over the years the wise counsel of our leaders
    has been to avoid debt except for the purchase of
    a home or to pay for an education. I have not
    heard any of the prophets change this counsel
    (Doing the Best Things in the Worst Times,
    Ensign, August 1984, 41).

7
Our Leaders Counsel (continued)
  • President Gordon B. Hinckley commented
  • We have been counseled again and again concerning
    self-reliance, concerning debt, concerning
    thrift. When I was a young man, my father
    counseled me to build a modest home, sufficient
    for the needs of my family, and make it beautiful
    and attractive and pleasant and secure. He
    counseled me to pay off the mortgage as quickly
    as I could so that, come what may, there would be
    a roof over the heads of my wife and children. I
    was reared on that kind of doctrine (italics
    added, Gordon B. Hinckley, The Times in Which We
    Live, Ensign, Nov. 2001, 72).

8
Our Leaders Counsel (continued)
  • He further counseled
  • I recognize that it may be necessary to borrow to
    get a home, of course. But let us buy a home that
    we can afford and thus ease the payments which
    will constantly hang over our heads without mercy
    or respite for as long as 30 years. I urge you
    to be modest in your expenditures discipline
    yourselves in your purchases to avoid debt to the
    extent possible. Pay off debt as quickly as you
    can. Thats all I have to say about it, but I
    wish to say it with all the emphasis of which I
    am capable (italics added, Gordon B. Hinckley,
    To the Boys and to the Men, Ensign, Nov. 1998,
    51).

9
B. Risks in Home Ownership
  • There are significant risks in home ownership
  • You buy too big a house
  • Your other goals (missions, etc.) are not met
  • You buy a fixer-upper without the skills or time
  • It stays a fixer upper
  • You buy the wrong type of house for your
    lifestyle
  • You must pay others to keep it up
  • You buy a house without the necessary inspections
  • You pay dearly for someone elses problems
  • You buy a more expensive house than you can
    afford
  • You lose your house, credit, and your self-respect

10
Risks in Home Ownership (continued)
  • The single biggest mistake young couples make out
    of school that impacts them the most financially
    is they purchase too big a house
  • Their other goals cannot be realized as they are
    paying so much for their house
  • They go farther and farther into debt to furnish
    and maintain the house
  • They cannot save for their other goals as they
    have little after housing costs to save
  • Their marriages and families suffer from the
    added financial strain

11
Understand the Home Buying Process
  • Purchasing a house is a four-step process
  • Step 1. Understand your limits
  • Know yourself , what you can afford and what you
    need when
  • Step 2. Find your home
  • Make sure you know what you want, and get it
  • Step 3. Negotiate your loan
  • Know what lenders need and be ready
  • Step 4. Enjoy home ownership
  • Realize you are a steward over all God has
    blessed you with. Be the best you can be

12
Step 1. Understand your Limits
  • Know yourself and your limits relates to 8 areas
  • a. Know your budget and how much you can afford
  • b. Know your credit score
  • c. Calculate your front and back-end bank ratios
  • d. Calculate your bank ratios for LDS
  • e. Choose your preferred loan type and term
  • f. Know what you need for a down payment and
    upfront costs
  • g. Have two years of copies of taxes
  • h. Get pre-approved

13
1.a. Know Your Budget and How Much You Can Afford
  • YOU MUST HAVE and Live on a Budget
  • President Spencer W. Kimball said
  • Every family should have a budget. Why, we would
    not think of going one day without a budget in
    this Church or our businesses. We have to know
    approximately what we may receive, and we
    certainly must know what we are going to spend.
    And one of the successes of the Church would have
    to be that the Brethren watch these things very
    carefully, and we do not spend that which we do
    not have (Marvin J. Ashton, One for the Money
    pamphlet, Intellectual Reserve, 1992, inside
    cover).

14
Budgeting The Old Way
Available for Savings
Income
Expenses
Tithing
Personal Goals
15
Budgeting A Better Way
Income
Expenses
Other Savings
Pay the Lord
Pay Yourself
Personal Goals
16
A Better Way (continued)
  • Elder L. Tom Perry said
  • After paying your tithing of 10 percent to the
    Lord, you pay yourself a predetermined amount
    directly into savings. That leaves you a balance
    of your income to budget for taxes, food,
    clothing, shelter, transportation, etc. It is
    amazing to me that so many people work all of
    their lives for the grocer, the landlord, the
    power company, the automobile salesman, and the
    bank, and yet think so little of their own
    efforts that they pay themselves nothing (L. Tom
    Perry, Becoming Self-Reliant, Ensign, Nov.
    1991, 64).

17
1b. Know Your Credit Score
  • Know your Credit History
  • Review your credit history every year from all
    three agencies
  • Three major credit reporting agencies
  • Experian (www.experian.com), Equifax
    (www.equifax.com), and Transunion (www.tuc.com)
  • You can get a free copy of your credit report
    from each agency each year by going to
  • www.annualcreditreport.com
  • Fill out the info and you can get a copy online
  • Make sure it is correct

18
Know Your Credit Score (continued)
  • Get your Credit Score
  • After checking your credit report for errors,
    order a copy of your credit score. I recommend a
    FICO score. You can order it directly from FICO
    at www.myfico.com for 19.95 (less with coupons)
  • What determines your Credit Score or lending
    risk?
  • Payment History What is your payment record?
  • Amounts Owed How much do you owe?
  • Length of Credit How established is yours?
  • New Credit Are you taking on more debt?
  • Types of Credit Use Is it a healthy mix?

19
1c. Know your Front- and Back-end Bank
Affordability Ratios
  • Know the rules for lenders
  • Know your affordability ratios
  • Ratio 1 Housing Expenses or front-end ratio
  • This ratio calculates what percent of an your
    income is used to make basic mortgage payments
  • Housing expenses should be less than 28 of your
    monthly gross income. The formula is
  • Monthly PITI lt28
  • Monthly Gross Income
  • PITI mortgage principle, mortgage interest,
    property taxes, and property insurance

20
Affordability Ratios (continued)
  • Ratio 2 Debt Obligations or back end ratio
  • This ratio calculates what percent of your income
    is used for housing expenses plus debt
    obligations.
  • It should not exceed 36 of your monthly gross
    income. The formula is
  • Monthly PITI and other obligations lt 36
  • Monthly Gross Income
  • PITI Mortgage principal, mortgage interest,
    property taxes, and property insurance

21
1d. Calculate Your Ratios for LDS
  • As members of the Church, we have other important
    obligations that we also pay, i.e., tithing and
    paying ourselves, i.e., saving
  • As such, should have smaller houses (at least
    less expensive), because we pay the Lord first
    and ourselves second.
  • For a spreadsheet that takes into account the
    fact that we pay the Lord first and ourselves
    second within this front-end and back-end ratio
    framework, see
  • Teaching Tool 7 Maximum Monthly Mortgage
    Payments for LDS Spreadsheet (from the website)

22
1e. Choose your Preferred Loan Type and Loan
Term
  • Choose your preferred loan type
  • The best type of loan takes into account your
  • Goals, budget, income stream, down payment, and
    view on risk
  • There are a number of different types of mortgage
    loans available. These include
  • Fixed Rate (FRMs) - RECOMMENDED
  • Variable or Adjustable Rate (ARMs)
  • Interest Only (IO) Variable or Fixed Interest
  • There are also special loans (if you can get
    them)
  • FHA (best for students) or VA (if military)

23
Fixed Rate Mortgages (FRMs)
  • These are mortgage loans with a fixed rate of
    interest for the life of the loan. This is what
    I recommend
  • Benefits
  • Higher but constant paymentsyou pay down
    principle faster
  • No risk of negative amortization
  • Interest rate risk is transferred to the lender
  • Risks
  • Interest rates are higher
  • Higher monthly payments may make payments more
    difficult, particularly for those not on a
    regular salary

24
Fixed Rate Mortgages (continued)
25
Adjustable Rate Mortgages (ARMs)
  • Mortgage loans with a rate of interest that
    changes periodically over the life of the loan
  • Benefits
  • Lower initial interest rates
  • Generally lower monthly payments, as you assume
    the interest rate risk
  • No risk of negative amortization
  • Risks
  • You assume the risk that interest rates rise
  • Possible payment shock as interest rates rise,
    perhaps beyond what you are able to pay

26
Adjustable Rate Mortgages (continued)
27
Interest Only Options (Fixed or Variable)
  • These are FRMs/ARMs with an option that allows
    interest only payments for a set number of years.
    After that, payments are reset to amortize the
    loan over the remaining years of the loan (it is
    not like a credit card)
  • Benefits
  • Lower monthly payments as you are paying
    interest.
  • You can afford more house due to lower payments
  • Risks
  • There will be a major rise in payments when the
    interest only period ends
  • There is no paying down of principle

28
Interest Only Options (continued)

29
Mortgage Loans (continued)
  • Insured Loans
  • FHA (Federal Housing Administration) Insured
    Loans
  • FHA does not originate any loans, but insures the
    loans issued by others based on income and other
    qualifications
  • There is lower PMI insurance, but it is required
    for the entire life of the loan (1.5 of the
    loan)
  • While the required down payment is very low, the
    maximum amount that can be borrowed is also low

30
FHA Loans
31
Mortgage Loans (continued)
  • Guaranteed Loans
  • VA (Veterans Administration) Guaranteed Loans
  • These loans are issued by others and guaranteed
    by the Veterans Administration
  • Are only for ex-servicemen and women as well as
    those on active duty
  • Loans may be for up to 100 of the home value

32
VA Loans
33
Recommended Loan Term
  • Choose your loan term
  • Generally, I recommend a 30 year fixed rate loan
  • However, I recommend you make additional payments
    on principal to pay off the loan sooner if
    possible after you have 3-6 months income in your
    emergency fund

34
1f. Know How Much You Need for a Down Payment
and Upfront Costs
  • Know what you will need for a down payment and
    upfront costs, and begin saving for it
  • Down payments
  • You will need a larger down payment to get into
    your home now versus two years ago
  • Begin saving for that now
  • Conventional loans 20 recommended, but you
    can get in with 5
  • FHA loans 3.5
  • VA loans 0 no down payment required
  • Once you realize how hard it is to save, it will
    help you not to spend too much

35
Down Payment and Up-front Costs (continued)
  • Upfront costs include closing costs and points
  • Down payment (3-20 percent of the loan amount)
  • Closing costs including points (3-7 percent)
  • Closing costs include
  • Credit report
  • Termite inspection
  • Prepaids (property insurance taxes, mort.
    interest)
  • Points
  • Title insurance
  • Attorneys fee
  • Property survey
  • Recording fees
  • Lenders origination fee
  • Appraisal

36
Up-front Costs (continued)
  • What are points?
  • One percent or one hundred basis points of the
    loan
  • This money is paid to the mortgage broker (not
    the lender), is deducted from the loan proceeds
    (you still must pay it back), and is essentially
    another fee for helping you arrange the loan
    (minimize points)
  • Why do lenders charge points?
  • To recover costs associated with lending, to
    increase their profit, and provide for
    negotiating flexibility
  • Do I have to pay points?
  • Origination points (likely), buy-down points (no)

37
1g. Have Copies of 2 Years of Taxes
  • Lenders want confirmation that you can pay back
    the loan
  • As such, they generally want to see two years of
    tax records
  • Have copies of your last two years of tax
    records, even though you were a student
  • If you have a confirmed job letter with salary,
    that may also be helpful as well

38
1h. Get Pre-approvedNot Pre-qualified
  • Get pre-approved for your loan by a number of
    lenders
  • Pre-approved means that lenders have pulled your
    credit score, looked at your tax records and
    approved you for a specific amount of a loan
  • You can borrow up to this pre-approved amount
    without a problem
  • I recommend you check with multiple lenders
  • Remember however that you do not need to borrow
    that amount
  • I recommend that you borrow less than that amount

39
Step 2. Find Your Home
  • There is a six step process to finding your home
  • a. Determine what is important to you
  • b. Develop a plan for finding a home
  • c. Use a realtor/team approach to find a home in
    your price range
  • d. Once you are serious about the home, get a
    home inspection (offers can be contingent on the
    home inspection)
  • e. Determine any CCRs/fees for potential homes
  • f. Negotiate the price

40
2a. Determine what is Important To You
  • Determine what is important to you and what you
    will and will not do without!
  • This may include
  • Location,
  • Home style and layout
  • Future plans, i.e., kids, work, schools, etc.
  • Realize that you will probably move within five
    to seven years (if you are like the average
    family)

41
2b. Develop a Plan
  • Establish a Plan for finding your home
  • Once you know your limits, what you can afford,
    where you want to be, and what you want (your
    Plan), then
  • Start driving around
  • Start looking in earnest
  • But keep to your plan
  • Use Zillow.com or other resources to find current
    home values in other areas you may be interested
    in

42
Develop a Plan (continued)
  • Be Patient and take your time
  • Estimate the time you will be in the house
  • If it is less than 3-5 years, look into renting
  • You must make 6-7 on your house price just to
    break even when you sell it (realtor fees are
    6-7)
  • You will be in the house for yearsdont make the
    decision to quickly
  • It will likely be your largest financial
    commitment you will make for a long time
  • Often renting a luxury apartment for 6 months
    will give you time to search thoroughly

43
2c. Use a Realtor/Team Approach
  • Get a good realtor
  • While realtors are working for sellers, it may be
    wise to have a buyers broker that works for you
  • They should know the ins and outs of the
    neighborhood you are looking at
  • Take matters into your own hands
  • Be proactivetalk with friends and others
  • Use the internet and other tools that may help
  • Stay true to your Plan and have patience
  • Be liquid and ready to react quickly
  • Be creative if necessary

44
Realtor/Team Approach (continued)
  • Use a team approachget lots of good help
  • Use others to help
  • Buyers broker
  • Appraiser
  • Attorney
  • Dont become emotionally attached to a potential
    house
  • Be willing to walk away

45
2d. Have a home inspection
  • Once you have found the home you like, can
    afford, and is where you want to live, have a
    home inspection
  • This may alert you to potential problems with the
    home
  • Many of thee problems should be fixed by the
    seller prior to purchase
  • Dont buy someones problems

46
2e. Determine any CCRs/fees for potential homes
  • Look to potential homes and potential costs
  • Look through all Covenants, Conditions and
    Restrictions (CCRs) for a potential home
  • These can be quite restrictive as to what you can
    and cannot do with your home
  • For condos or town homes, determine the amount of
    the transfer/setup fees
  • Understand any other homeowners/association fees
    for potential homes and what they include

47
2f. Negotiate the Price of the Home
  • Use the best available resources to negotiate a
    price for the home
  • Use wisdom and judgment in determining what you
    can and should pay for the home
  • Realize your best negotiating technique is
    walking away
  • This is a negotiation processdo not be afraid to
    haggle
  • Realize that closing costs, things that need to
    be fixed, and other things can all be part of the
    negotiated price
  • Most things are negotiable

48
Step 3. Negotiate the Loan
1. Youve found a home that suites your lifestyle
and budget, using resources such as a realtor.
7. Broker, Title, Escrow, and Lender work to fill
all conditions
8. Lender sends out the documents to escrow for
signing
6. Lender takes the loan package, structures the
loan and conditions for any additional
information they need to close the deal.
9. Lender audits the documents, verifies all
conditions are filled, and funds the loan!
2. The realtor refers you to a mortgage broker.
3. The broker pulls credit, determines your needs
and tries to find lenders among the competition
to meet those needs.
4. Each lender has unique programs. Lender and
broker negotiate points, rates, fees, and other
features of the loan.
5. Broker recommends the best loan to the
consumer, reviewing the features agreed upon.
Consumer makes the final decision.
49
The Lending Process
50
Negotiate the Loan (continued)
  • Negotiate the loanthis is the final part of the
    process. It is a three-step process
  • a. Choose multiple lenders to compete for your
    business and get Good Faith Estimates from each
    of your lenders
  • b. Take the various loan offers from the lenders
    and calculate your lowest Effective Interest Rate
  • c. Find the best rate from the multiple lenders
    and take it to your favorite lender and ask him
    to beat it

51
3a. Choose Multiple Lenders and Get Good Faith
Estimates
  • You will get a lower interest rate when lenders
    compete for your business
  • Work with multiple lenders
  • Talk with friends and others who have gone
    through the process for their favorite brokers
  • Hold brokers accountable for what they say
  • Get Good Faith Estimates from each lender (not
    just a Summary)
  • These are the costs you will likely pay
  • Compare GFEs from each lender

52
3b. Calculate your Effective Interest Rate
  • Estimate how long you will be in the home
  • This is important as it helps determine over what
    period you can allocate points and other costs
  • Calculate your effective interest rate for each
    loan
  • Your effective interest rate is the interest rate
    you will pay after all your points, costs, and
    fees are taken into account
  • Get your best rate
  • The lowest effective interest rate is the best
    indicator that you got a good rate on your loan

53
3c. Negotiate with Your favorite Lender for the
Best Rate
  • The key now is to find the lowest rate
  • Once you have multiple offers from multiple
    lenders, then you have bargaining power
  • Determine your lowest rate, which includes
    points, fees, and the loan APR after evaluating
    each of the offers from the various lenders
  • You can take that offer if you want
  • Or, you can that offer to your favorite lender
  • Then ask them to beat it by 1/8 to ¼ percent and
    you will go with them

54
Step 4. Enjoy Home Ownership
  • Enjoy home ownership
  • Maintain it well
  • Take care of your purchase and it will take care
    of you
  • Generally it will take roughly 1 of the homes
    value annually for upkeep. Budget accordingly
  • A professional cleaning a few times a year can
    help retain a homes value
  • Now keep the value of your home up!

55
Summary
  • Keep Buying a house in its proper perspective
  • Its part of your personal goalsbut not the only
    goal
  • Keep striving to be financially self reliant
  • The habits you develop now will last a lifetime
  • Remember what our leaders have said about home
    ownership
  • Buy a modest home that you can afford, and pay it
    off quickly)

56
Summary (continued)
  • We must have a correct perspective on finances.
    It is based on four key principles
  • 1. Ownership Everything we have is the Lords
  • Things we have are not ours but on loan
  • 2. Stewardship We are stewards over all God
    shares with us
  • We must learn to be better stewards
  • 3. Agency the gift of choice is a wonderful
    gift
  • We must used that agency wisely
  • 4. Accountability We will be held accountable
    for all our choices in life
  • We must make the best choices we possibly can as
    we will be held accountable for them

57
Summary Step 1 Understand your Limits
  • Knowing limits is an eight-step process
  • a. Know your budget and how much you can afford
  • b. Know your credit score
  • c. Calculate your front and back-end bank ratios
  • d. Calculate your bank ratios for LDS
  • e. Choose your preferred loan type and term
  • f. Know what you need for a down payment and
    upfront costs
  • g. Have two years of copies of taxes
  • h. Get pre-approved

58
Summary Step 2. Find Your Home
  • Finding your home is a six-step process
  • a. Determine what is important to you
  • b. Develop a plan for finding a home
  • c. Use a realtor/team approach to find a home in
    your price range
  • d. Once you are serious about the home, get a
    home inspection (offers can be contingent on the
    home inspection)
  • e. Determine any CCRs/fees for potential homes
  • f. Negotiate the price

59
Summary Step 3. Negotiate the Loan
  • Negotiating the loan is a three-step process
  • a. Choose multiple lenders to compete for your
    business and get Good Faith Estimates from each
    of your lenders
  • b. Take the various loan offers from the lenders
    to calculate your lowest Effective Interest Rate
  • c. Negotiate with your best lender the best rate
    by asking them to beat your best offer by a
    specific percentage

60
Summary Step 4. Enjoy Home Ownership
  • Finally, enjoy home ownership
  • Maintain it well
  • Take care of your purchase and it will take care
    of you
  • Generally it will take roughly 1-2 of the homes
    value annually for upkeep
  • Budget accordingly
  • A professional cleaning a few times a year can
    help retain a homes value
  • Now keep the value of your home up!

61
Review of Objectives
  • A. Do you understand what our Leaders have said
    regarding buying a home?
  • B. Do you understand risks in home ownership?
  • C. Do you understand the Four-Step Process for
    Buying a Home?
  • Step 1. Understand your limits
  • Step 2. Find your home
  • Step 3. Negotiate your loan
  • Step 4. Enjoy home ownership

62
Introduction to the Marriott School of
Management Personal Finance Website
  • The Marriott School has put together a website to
    help you with this and other Personal Finance
    decisions.
  • Please visit the website at
  • http//personalfinance.byu.net
  • This presentation was taken from three lessons
    on
  • Understanding Credit
  • Understanding Consumer and Mortgage Loans
  • The Home Decision
  • These PowerPoints are available under Tools and
    Resources, Other Resources, and Buying a Home

63
BYU Website 1
64
BYU Website 2
65
BYU Website 3
66
Summary
  • Let me share one of my favorite scriptures with
    you that summarizes what I feel for each of you
    and what is ahead
  • For verily, I say unto you, that great things
    await you (DC 4562).
  • For great things truly do!
  • Thank You

67
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  • Getting too many credit card applications? There
    is a national credit opt-out number or an online
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    of all four major credit reporting agencies
  • It is easy and painless
  • Call 1-888-567-8688 or 1-888-5 OPT OUT or go to
    www.optoutprescreen.com
  • Answer the questions on the phone or on the net.
    It only asks your home phone number, your name,
    and your social security number. Then they send
    a form to fill out and mail in.
  • It is worth it (unless you like junk mail).
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