Why not buy house rather than rent it?
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By Scott Sheldon  July 19, 2013 12:00 am

If you have never owned a home before, owned a home in the past or previous circumstances require you to rent a home now, and you’re thinking about buying a home again, we have good news. 

An opportunity in the market is to purchase the home you live in. That’s right, make a purchase offer to your landlord about buying the home you presently rent. 

The blanket belief your landlord doesn’t want to sell is simply not true. By communicating your intention to purchase the house directly from your landlord, transaction becomes easier for both parties.

Purchase advantage

• Virtually no other competition, just you and the seller;

• You, in turn, benefit because the seller enjoys reduced selling costs without using a listing broker;

• Can be done with or without a real estate agent;

• More allowable time to perform on the sales contract;

• No need to search for more homes as you may have already customized the home to your liking.

Here are three steps to take when buying your home from the landlord:

•Step one, get preapproved: If you’re serious about buying a home, especially in today’s credit market, emphasis is placed on your ability to perform on a real estate sales contract. Unless you have your purchase offer in cold hard cash in the bank,  you’ll need mortgage financing. 

Find a mortgage lender that has experience and the ability to close a loan transaction from buyer and seller both with and without real estate agent representation. This way, later on down the road if you  or the seller decide to bring in a real estate professional in the transaction, you can still secure financing.  

To attain a proper loan pre-approval, you’ll need to provide supporting financial documentation to a mortgage lender as well as give them a loan application and give them permission to obtain a copy of your most recent credit report.

• Step two, make an offer: Bring an offer in writing to your landlord and present a fair market price for what you think the home is worth. Two ways to accomplish this are to bring a real estate agent into the transaction so they can make the offer on your behalf or, depending on the nature of your relationship with your landlord, a one-page piece of paper stating the sales price, terms of the transaction between you and the seller and signed and dated both parties is sufficient for mortgage loan financing.

• Step three, get into contract: The chances are  you’ve been living at the home for some time and you already have a feel for what life is like on the property. As an informed buyer, you’ll want to obtain a pest inspection and a home inspection if you feel it is necessary.  This is typically recommended. 

The only required fee is an appraisal costing around $400-$500. An appraisal is needed to determine if the sales price meets the actual valuation of the home. Your mortgage lender will lend on the appraised value or the sales contract, whichever is lower.

If the appraised value is equal to purchase price, then you meet the lending guideline. If the appraised value is above the purchase price, the lender will make the loan on the sales contract, and you purchase the home equity moving forward. If the appraised value is lower than the purchase price, you can choose to pay the difference or the purchase price can be reduced to match appraised value.

Essential home loan characteristics

Getting a mortgage does require providing thorough supporting financial documentation as well as  acceptable debt ratios, credit score and liabilities. A successfully closing escrow loan is simply a function of having enough income coming in every month to offset monthly liabilities. Liabilities lenders look for are such things as child support, alimony  and typical liabilities that show up on a consumer credit report such as credit card payment  obligations, car loans and student loans, etc.

Lending tips

• Credit score  requirement will need to be at least 620 or above.

• Income will need to be approximately  55 percent higher then all liability payments and total new housing payment. Put another way, take a house payment you can afford, add present minimum payment obligations, then divide this figure by .45 percent. This will calculate the minimum income you’ll need to qualify for the house payment. If no liabilities, take your monthly income, multiply by .45 percent, and that’s the total house payment you qualify for, including principal and interest, property taxes, fire insurance and potentially monthly mortgage insurance (incumbent upon down payment amount and loan program).

• Down payment amount varies, unless you’re buying a home in a rural area, which allows for no minimum down payment, you’ll most likely be looking at a down payment needed of approximately 3.5 percent.

• Be prepared to show all supporting financial documentation, including all pages of personal income tax returns and any applicable filed income tax extensions.

Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.

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