Is a Deposit Necessary When Buying a Home?

March 5, 2014 By Leave a Comment

When you are buying your first home, is it necessary to save up a deposit? Saving up a deposit can be an intimidating prospect for many first time home buyers; because they think that it will take them many years to save up enough cash for the deposit on their home.

Although saving money can be challenging, a deposit is quite necessary for buying a home. You need to have at least some savings to put into the purchase, so that you can start with equity in your property. Also, there are many disadvantages to choosing a mortgage with a low deposit. A low deposit mortgage might have a very high rate, because the lender is taking more of a risk on you.

Even the Help to Buy Scheme, a program designed to assist first time buyers in the UK, requires you to contribute at least 5% of the property price as a deposit. The government will then give you a loan for up to 20% of the price and you will need to take out a mortgage for the 75% left over.

Of course, it is possible to buy a home without a deposit – it is just more difficult. Sometimes you might be able to use a guarantee from your parents, which is backed against a mortgage on their property. This equity can help you to make your home purchase and it is known as a family guarantee. Of course, this situation means that if you default on your mortgage, not only you will lose your home but your parents could also be at risk of losing theirs.  Also, your parents might be worried that they will need the savings for themselves when they retire.

So How Much Do I Need for a Deposit?

When you are buying a home with mortgage lenders such as cbonline, you should only start looking when you have saved at least 5% of the purchase price. Ideally, you would save more than this for your deposit, but 5% is the absolute minimum that you should consider.

If you are paying a deposit of less than 20%, you might need to pay what is known as Lenders Mortgage Insurance, which will allow you to borrow a more substantial percentage of the property purchase price. This insurance is usually included in the upfront costs of the loan or spread out over the term of the loan.

Of course, if you can save up to 10%-20% of the home’s value for your deposit, this will be ideal. The more you have saved up for a deposit, the better.

Reasons to Save Up a Larger Deposit

Why should you save up a large deposit? There are many advantages to saving up as much of a deposit as you possibly can, such as:

·         Your mortgage application will be more likely to be accepted if you have a large deposit. This is because the mortgage lender will see you as less of a risk because you have proven that you are in a stable financial situation.

·         Paying a large deposit will reduce the amount of the loan, which means that you will save thousands in interest payments over the years.

·         There are also shorter term fixed rate mortgages that are available to borrowers who pay large deposits, which will save you a lot of money in the long term. This is because banks want to offer low interest rates to low-risk customers.

·         When you invest a large deposit into your home, you will have more equity in your property.

Of course, it is up to you how much you want to save up for a deposit on your first home. You will need to consider a number of factors, such as the price of the home, whether you have an emergency savings fund, your future plans and expenses, your financial situation and much more. For example, spending all of your savings on a deposit might not be wise if you don’t have an emergency fund saved up – as you won’t have any savings to rely on if something goes wrong. Figure out the level of deposit you are comfortable with, so that you can make your first home purchase with ease and keep yourself in good financial standing.

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Benefits of FHA Home Financing

December 6, 2013 By Leave a Comment

FHA home financing can be one of the best alternatives to homeowners who cannot qualify for a conventional loan.  Future homeowners should consider all types of loans before choosing one type, then shop different providers for that loan to get the best terms.  Many homebuyers that follow this strategy often decide on an FHA loan as their best option, because of the following benefits.

More Homeowners Qualify for an FHA Loan

Some homeowners choose an FHA loan simply because they are not able to qualify for a conventional loan.  One of the primary barriers to qualification is the down payment.  Decades ago, conventional loans often required 20% to 30% down payment.  Young couples scrimped and saved for years to come up with enough money to make the down payment.  As home prices increased at a greater pace than average revenues, the number of couples that qualified began to drop.  In order to address this problem, the government created FHA loans.  This served to stimulate the housing market, which is a leading economic indicator.  With government backing, the requirements for a down payment dropped significantly.

In some ways, conventional loans responded to the growing housing market as well.  Homebuyers can find lenders that will offer conventional loans at as low as 5% of the house price.  However, these often come with the prerequisite that homebuyers obtain PMI (private mortgage insurance).  This has the effect of amortizing a portion of the down payment into the monthly payments.

The Government Assumes a Portion of the Risk

The FHA comes with superior terms because the federal government assumes a portion of the risks.  For any financial instrument, the interest rates are in proportion with the risks.  The risk which determines the interest rate on a home loan for an individual depends on the state of the economy, the risk factor of homebuyers in general, and the credit history of the individual purchaser.  The government assumes a portion of this risk, which lowers FHA interest rates.

For conventional loans, the ability of the homeowner to save a down payment is the leading indicator of the financial ability of that homeowner.  The government compensates for the increased risk of a lower down payment as well.

Consider the Increased Regulations for FHA Loans

The government must manage the risks of FHA loans just as banks manage the risk of conventional loans.  They do this by imposing more rules and regulations on the homeowner.  Although an FHA loan reduces the barrier of a large down payment, the personal qualification requirements are generally much higher.  If a homeowner can afford the down payment for either type of loan, then he or she will qualify for the conventional loan much more easily.

FHA loans also contain restrictions on the maintenance of the loan.  Homeowners who sell or refinance their homes early on in the term may be surprised with significant penalties.  Many of these overcome the benefits of taking an FHA loan in the first place.  If a family determines it is unlikely they will keep their home for a period beyond 3-5 years, then they need to do a careful comparison of loans in both the event that they stay in their homes for an extended period and if they do not.

FHA home financing carries significant benefits, but homeowners should carefully compare all of their loan options for their unique financial situation before making a final decision.

Filed Under: Real Estate

The Pros and Cons of Rental Real Estate

May 15, 2013 By 3 Comments

There has been a lot of talk lately about the benefits of rental real estate and how it can help you become financially independent by bringing in purely passive income month after month. However I have a few cousins who own a number of rental properties and ever so often I keep discussing with them about how things are panning out so I get deep insights into the pros and cons of rental income.

Pros:

1. Low Real Estate Prices

Ever since the housing bubble burst, prices of all kinds of properties have fallen to extremely affordable levels and the mortgage rates as well are at historic levels. All this makes rental real estate a great choice as you might be able to grab great deals that can make you a ton of money in the future, both by capital appreciation as well as monthly rental income (provided you did your homework right and invested in the right property).

2. Passive Income At Its Best

There are only a few asset classes that can provide cash flow each month while requiring very little or no maintenance. And this is where rental properties are so effective. The only challenge is finding a reliable tenant and once you do that, the income will start flowing in, which you can then use in whatever way you like.

3. Capital Appreciation

As I mentioned before, it’s about the right time to purchase a rental property. The housing market is beginning to show some strength and prices are going to increase in the future. Although you can’t expect to double or triple your purchase value in the next few years, chances are you will get a good rate of return if you’re in it for the long haul, due to decent capital appreciation and monthly income from rents.

Cons:

Things might be looking all hunky-dory at this point, but there are a number of challenges associated with managing rental properties as well. Here they are:

1. Buying Ain’t Easy

Although mortgage rates are at historic loans, this doesn’t mean anyone can get a loan for a property just by putting some money as down-payment. It’s much harder now to qualify for loans than it used to be since banks want to make sure they don’t give a loan to someone who might end up defaulting. Apart from that, there are also other costs to consider, such as a substantial down payment, legal fees and any renovations/repairs that need to be made before renting it out.

2. Finding Tenants

This might seem to be an easy thing to do, but ask those who own a few rental properties and you’ll know finding a reliable tenant takes time & patience. Even when you seem to have found one, you would need to do a background check to ensure everything’s right. IF you don’t want to take the trouble, you can always hire an agency to do that for you, but you will lose out on a major chunk of the profits you would have made if you had dealt with everything directly.

3. Maintenance

A landlord is responsible for all the things that have to be taken care of in the rental property. This includes collecting the rent, fixing the leaks, repairing any broken windows and many other things that might irk potential/current tenants. All this takes a good amount of time, and if you don’t want to devote any time towards maintaining your property, then you should perhaps reconsider your decision of owning one.

Would you want to invest in rental real estate? What are your thoughts on it?

Filed Under: Investing, Real Estate Tagged With: ,

Real Estate Funds – Meaning and a Guide to Its Benefits

April 23, 2013 By Leave a Comment

Real estate is a physical asset but it can be converted into a profitable investment as well.  You can have ownership interest or leasehold interest. In ownership interest, you assume all the rights of the land or property. You are responsible for the payment of property taxes or any other losses to the property. But in leasehold interest a tenant comes into action. The landowner generally gives some rights to the tenants in exchange of the monthly rent.

Characteristics of Real estate funds:

  • There is no time period. You can sell off the property and get the money whenever you want. You won’t have to wait for a maturity date and so the flexibility is high in this kind of investment.
  • Real estate is tangible property. Your acquired property can be seen by your family and friends.
  • Real estate is a physical property which will require upkeep.  If there is a leaking pipe then you have to fix it. Renovation will be required once the building gets older. You have to address complaints of the tenants so that they do not vacate their flats.
  • Before buying a real estate property always make sure that you are buying it at a good location. Different people have different preferences. Your definition of a good location should match with the locals of that area where you are planning to buy the property.

Private and Public Markets for Real estate investment:

  • If you are planning for real estate investments then you can opt for two kinds of markets: private and public market. In private market you will buy a chunk of real estate. You will be the owner and you can deal through a property manager. If you think that the cost cannot be handled alone then you can collaborate with partners. This combined purchasing is called pool.
  • In public market, you can purchase real estate security.  You will just buy shares from those companies that own real estate properties. The company will deal on your behalf and will pay you back in the form of dividends. Whether the price goes up or down, it will automatically affect the share or unit price.

Investing in Equity or Debt

  • You can select to invest in Equity or debt. Investing in a debt means you are loaning funds to the purchaser of real estate. In addition to the periodic payments you will also receive a mortgage security amount.  You will have a priority interest in the property.
  • With Equity investment, you are the owner of the property. You will borrow money from the debt investors.  Though equity investment entitles larger profits, you may have to forfeit your rights if at any point of time you are unable to pay the mortgage amount to the debt investor.

Real estate investments have characteristics of both bonds and stocks. Its basic advantage is the consistent income though the value of it can fluctuate. Tenants have a huge role to play. You cannot afford to lose too many tenants as you will always need a steady flow of money to maintain the operating costs. This will again depend on the condition of the leasing market. You will have to adjust the rent according to the market conditions.

Get your property evaluated.  You can appoint an appraiser so that you have an idea about the sale price of your property. If it’s more than the price you paid while buying the property then it can be called as a positive capital return. The appraiser generally considers actual sale transactions and market data to label a price. The behavior of the investment sales market is also taken into account.

Justin Foster is a one of the top producing real estate agents in Minneapolis, Minnesota. He has extensive experience in new construction and existing residential properties. His inspiration to succeed is Cornerstone Core Properties. Join him on twitter @IamFosterJustin

Filed Under: Real Estate

5 Critical Hazard Disclosures That You Ought to Make Before Selling Your Property

March 14, 2013 By Leave a Comment

There are certain disclosures to be made by the seller at the time of selling property. These disclosures should be produced to the potential buyers before exchange, sale, transfer, or even the ground lease of a residential property.

Owners of residential properties must provide a natural hazard disclosure statement to the purchaser that describes the condition of property, and other potential hazards nearby.

What Should the Disclosure Report Contain?

In addition to standard statement by the civil board, the disclosure must contain details about areas susceptible to natural disasters, earthquakes, fires, and repeated floods. They should give a separate statement if the property lies within these specific areas.

  • A special fire hazard zone is designated by the California Department of fire and forestry protection.
  • An area with flood hazard selected by Fed Emergency Management agency.
  • A wild land fire area designated by State Board, checking substantial forest hazard and fire risks.
  • A seismic hazard zone and earthquake fault zone authorized by the State Geologist.
  • A region of potential flooding during the time of dam failure created by Emergency Services Officers.

Legal Implications

Repeated earthquakes, fires, floods, and other natural disasters have impelled state lawmakers to mandate sellers to inform purchasers about the condition of the property they might buy.

The real estate agent and seller involved in the selling, exchange or transfer process must form a transfer disclosure statement and hand it over to the purchaser. It’s mandatory for all the realtors and sellers involved in the transaction process to state all the facts about the property clearly, sinceas it may potentially influence the buyer’s decision.

Disclosures for New Properties

During the sale of the new houses, as part of project,a public report has to be formed and delivered to the buyer. If the new house is sold through real estate agent, not a developer, then the broker has to disclose facts that might affect desirability, and value of the property.

Importance of Natural Hazard Disclosure

There are certain things to be followed when delivering the transfer disclosure statement; if you want to avoid your client cancelling the deal after execution, you should hand over a copy of this statement to your buyer during the time of negotiating the deal. You can also deliver the disclosure statement to the buyers during the physical inspection.

Unless the property is free from disclosure prerequisites, all real estate agents and sellers must reveal if the property is located in a natural hazard zone, like fire, flood, or seismic zone.

The disclosure must be prepared as a legal statement and usually, the seller appoints a third party to prepare a report and complete the natural hazard disclosure declaration. The real estate agents or sellers, and buyers must also acknowledge and sign the statement.

The buyer has the right to reject the deal if the disclosures are not produced to them after the execution of the deal. If the statement is personally handed over to the buyer, he/she has 3 days of time to reject the offer, while if it was sent through email buyer has5 to 6 days to terminate the contract in case of any discrepancies.

Filed Under: Real Estate

5 Tips to increase the value of your home

December 8, 2012 By Leave a Comment

Making improvements to your home can have a significant impact to its overall value. These changes can be made in order to set up your home for a future sale, or can just help to build further equity and value in your property over time. You can increase value in your home in a number of ways, from decluttering space and going for a minimalist decor, through to installing wet rooms, building extensions, and investing in eco solutions. More on these value enhancing approaches to home renovation can be found below:

1 – Decluttering and Changing Your Interior Design

One of the best ways in which you can enhance the value of your home for potential buyers can be to clear out any clutter that may have built up over the years. This means sorting through attics and basements, and being ruthless with old clothes. Spending the time to declutter can also work well when combined with a renovation of your interior design to involve a more simple and neutral style. Cream and white colours, and minimalist furniture will make it easier for new buyers to make more specialist changes.

2 – Adopting Eco Solutions

Further levels of value can be added to your home by making it greener and more sustainable for the future. Estate agents can market homes with a higher eco rating, while investments in eco energy sources can reduce bills and potentially lead to changes in council tax payments. Some simple ways in which you can make your home greener include refitting old light bulbs with LED strips, as well as installing low energy faucets for showers, and low energy flushes for toilets. Other approaches can involve buying eco saving white goods for the kitchen.

3 – New Extensions and Conversions

A new extension or conversion for your home can help to make the most of available space, and can be particularly valuable if you aren’t using your garden very much. Adding in a conservatory or an orangery with blinds can create an additional room for pets and washing machines, as well as a space for gathering in the summer. Alternatively, it’s possible to convert adjoining garages into spare rooms if not being used for cars and storage.

4 – Install a Wet Room

An excellent option if you have a spare bathroom, a wet room represents a more unique way of approaching space. A wet room involves waterproofing a room, while removing large shower enclosures and bath tubs to have a shower head and a drain for water. Wet rooms consequently create more space, and can use screens to prevent water damage, while providing safer options compared to climbing in and out of baths and stepping out of showers.

5 – Renovate the Front of Your House

Part of your home’s value is based on first impressions made by people as they drive or walk past a property. You can enhance this value by investing time into landscaping and changing gardens at the front of your property, while also cleaning around windows and repainting or replacing window frames and doors. Paving over part of a garden can also work well if you want to add an extra parking space.

Liam Ohm writes about finance. He recommends guarantor loans from GBP Loans for a range of great financial options. He enjoys giving others advice and helping out both online and in the real world.

Filed Under: Finance, Real Estate

Maximising Long-Term Returns on Waterfront Property Investments

November 24, 2012 By Leave a Comment

It might only be where water meets land, but waterfront and beach-front properties are always in high demand. In recent years the idea of living on the water may have become less obviously appealing given the string of global natural disasters which have received so much media attention, but as a real estate market stable properties in beach communities will always yield high market value. As such, it is extremely difficult to find a property some place where the purchase price is low, but the value is still expected to increase with time. There are a few clever ways to find a steal left out there, with a bit of patience in the search process, and the right eye for future value.

Riverside

Instead of focusing on the ocean, today many people are finding great success with properties bought alongside rivers. There is a certain romance to the slow pace and dreamy appearance of a river, which still gives the settling feeling of proximity to a body of water. Look for areas with a nearby concentration of river-front commerce with growth potential over a 10 to 20 year time frame. Many such communities have river walks and boardwalks in the works, so consult with local government as to any future plans. Such features boost liveability and tourism. It is also advantageous to look for an area where lifestyle features can be accessed either from the property or nearby. Seek out areas with facility for aquatic activities such as boating, fishing, swimming etc.

Transitioning Industrial Ports

Immediately surrounding many cities are large river, bay or ocean-side communities which have been eaten up by ugly industrial developments. Many such developments are many years old, and cities are looking to reclaim such areas and reallocate them to civilian use. Expect the process of gentrifying such areas to take many years, and look at real estate in such areas as long term investments. Focus on areas where large quantities of government money are being poured into the area. The more the government is willing to invest, the less you will have to in the basic clean-up of the area. Often there are tax breaks and other benefits to businesses and individuals looking to buy or develop in such areas, so do some research before investing.

Breathtaking Water Views

In a world where many people get around in motorised vehicles, it’s no loner such a large priority to step right out onto the beach. Many people actually feel a bit better putting some distance between themselves and Mother Nature. Properties with breathtaking views fetch far more than those that are simply nearby a body of water, even though such a property might be closer. Avoid buying in the ‘grey area’ where beach access is not in walking distance, and there is little to no water view as these areas tend to have elevated prices which will rise but only at standard market rates. Instead follow the ’20 minute rule,’ where buyers will want to drive no more than 20 minutes to access either the water, or commercial amenities. Choosing a property just a bit removed from an already gentrifying community, even a small one, with a great water view will see excellent capital growth with time, and would likely prove to be a cash-flow positive rental property in the meantime.

Sharon Freeman is a freelancer who writes about Real Estate around Coogee & Randwick.

Filed Under: Make Money, Real Estate