CFASB Financial Literacy Series Presents: Home Ownership February 22 nd, 2018 Presented by: Vaughn Kerr, CFA
Agenda 1. Getting Started: Purchasing Your First Home/Property 2. Financing For Your Home/Property 3. Choosing A Real Estate Agent 4. Choosing an Attorney 5. Closing On Your Home/Property 6. Home Construction Basics 7. Mortgage Financing Example
1. Getting Started: Purchasing Your First Home
Steps to Getting Started 1. Meet with Financial Institution: Apply for mortgage pre-approval. 2. Put together a qualified team of experts: - An experienced real estate agent or builder - A knowledgeable loan officer - A legal expert 3. Learn more about the home buying process.
2. Financing For Your Home
What Kind of Home Can I Afford? Lenders will determine your maximum mortgage amount based on: Your income and credit history Available money for down payment and closing costs. Some lenders will allow current assets to be used as collateral Your debt to income ratio» Your current income» Your existing debt» Generally speaking banks will look for a debt to income ratio no more than 40% of total combined earnings
How Do I Approach Bank for Financing Shop around to compare best rates and packages Prepare to provide the following: Passport / NIB card / Bank Statement (last three months) Current Job Letter Last 3-4 pay slips Declare credit cards Declare any loans car, student, or other Sales Agreement (for property or existing structure) If building on property a construction agreement & approved floor plans are required (from Ministry of Works). Life Insurance for total value of mortgage amount (if joint application both applicants have to take out separate policies)
How Do I Get The Best Financing Plan? Less debt improves your chances Debt Service Ratio (DSR) is utilized to qualify how much money you can receive for your real estate acquisition. If you own existing assets they may be used as collateral If not able to meet the full deposit banks may charge a higher rate along with a one time payment for Mortgage Indemnity Insurance (MDI) If you re married/couple, get a mortgage that one person can afford - In the event one person gets sick, laid off etc
3. Choosing A Real Estate Agent
Agent or No Agent? Using an Agent - Convenient (time saver) given understanding of local market - Access to exclusive listings - Tailored properties are shown - Paper work is managed (i.e. sales agreement and offer letter) - Seller pays agent fees (typically 6% for developed property, 10% for vacant land) NOT using an Agent - More time consuming - Learning curve to read between the lines of ads - Negotiating directly with seller or sellers agent may be more difficult - More time needed to understand all paperwork
Choosing a Home/Property: Additional Factors to Consider Get an idea about the demographics of the prospective neighborhood (is it a good fit for you/your family?) If buying land: Extra expenses related to your lot (ie. Low lying / access if not low lying) Utilities Do electric cables run underground? Can lead to additional expenses to connect if constructing a home.
4. Choosing an Attorney
What to Expect from An Attorney The attorney makes sure you will have clean title to the property and that your purchase is properly recorded among other things. The lender will typically provide a list of attorneys that you can select from to handle the closing on their behalf. Very important to ensure that the attorney has professional indemnity insurance in excess of the property sale or mortgage. This ensures the customer and bank are protected in the event that something is overlooked. There are fees associated with the attorney find out what % the attorney will charge usually around 2.5%
Who Else Is Involved? An appraiser will formally evaluate the property to assure the lender that the price is valued at market value. You can opt to hire a building inspector to determine if the home/building is in good shape. Some buyers choose to have a pest inspector check the property for insect damage.
5. Closing On Your Home
Closing Typical Closing Cost Breakdown:! Bank (Mortgage Origination) Fee: 1%! Attorney Fees: 2% to 2.5%! Stamp Tax*: 2.5%! VAT*: 7.5%! (Optional) Mortgage Indemnity Insurance (MDI): 1%-2%! Some banks may approve to have MDI taken out if the client cannot meet the full deposit requirement. *Note: Waiver in place for first time home buyers. Note that the amounts are currently under review by the Government to be changed in the near future.
Closing Costs Calculation (Gross Sale) Property Purchase Amount $300,000 Bank Fees 1.0% $3,000 Attorney Fees 2.5% $7,500 Stamp Tax* 2.5% $7,500 VAT* 7.5% $22,500 MDI $0 Total 14% $40,500 Purchase cost + Total Fees $340,500 Total down payment 10% $30,000 Mortgage amount $270,000 *An exemption of these fees apply to first time home buyers.
6. Home Construction Basics
Building From the Ground Up: What You Need To Know To Get Started Decision Making: How will I organize my project? Where will I store documents relating to home build? How will I track conversations with my builder? Who is my main point of contact with the builder I ve selected? What is my goal completion date? Is it reasonable? What benchmarks must be met to make this goal a reality? Allow for real life situations on completion date.
Building From The Ground Up Continued Work with the right team: Get references: ask builder for past client references. Trust: if you trust your builder you will trust the subcontractors they select Questions: Ask your builder for information on anyone who will be working on your home
Building From The Ground Up Continued Obtain the proper building permits and insurance.
What Is Involved In The Construction Of A New Home? Contractor outlines stages of construction: Excavation / Clearing of Property Foundation Belt Course Roof Windows/Doors Interior Septic / Waste Disposal Finishing
Construction Finishing Touches Final Inspection by a lender approved Quantity Surveyor (QS) Issuance of Occupancy Certificate Once occupancy certificate is granted it is used to turn on all utilities: Note that all require some form of deposit» Electrical (varies if utilities are ran underground)» Water» Internet» Cable MORTGAGE PAYMENT BEGINS
Furnishing Your Home Furnishings are not included in the standard contract. You will need additional funds to purchase o Kitchen appliances o Laundry appliances o Air conditioning o Flooring o Furniture for all rooms o Check with contractor if water heater is included building price Landscaping will also be at your expense.
7. Mortgage Financing Example
Mortgage Repayment Example Inputs Loan amount (Purchase price less down payment) Interest rate Term of loan Number of payments per year
Closing Costs Calculation Property Purchase Amount $300,000 Bank Fees 1.0% $3,000 Attorney Fees 2.0% $6,000 Stamp Tax* 2.5% $7,500 VAT* 7.5% $22,500 MDI $0 Total 13% $39,000 Purchase cost + Total Fees $339,000 Total down payment 10% $30,000 Mortgage amount $270,000
Mortgage Repayment Example
Q&A
Appendix Useful links Bahamas Real Estate Association http://www.bahamasrealestateassociation.com/ The Bahamas MLS http://www.thebahamasmls.com
Additional Expenses to Consider for Home Ownership Repairs and Maintenance Specialists recommend budgeting at least 1% of the value of the home each year to cover routine maintenance Painting Plumbing AC Repairs Roof leaks Heater replacement Appliance replacement Landscaping Property Insurance Property Tax Home Owners Association (HOA) fees Content Insurance Hurricane Preparedness
Why Buy Instead of Rent? Arguments in favor of buying: When you pay off your home, it s yours. You eliminate the expense of housing once you ve paid it off. If the home appreciates more than you ve paid in mortgage, interest, property taxes, insurance, and maintenance over time, you ve earned a return, or you break even. Builds equity in a valuable asset that can boost long-term net worth Able to customize property to fit personal taste Arguments in favor of renting: Homeownership is a long-term financial commitment. You own your house, but you pay quite a bit in interest and taxes. Renting isn t throwing money away you get a place to live. Buying has an opportunity cost the amount you can invest and earn on the down payment, taxes, insurance payments, and interest. You don t have to pay for repairs, maintenance, property insurance, or other issues that come up.
Building From The Ground Up (Additional Notes) Construction gives you an opportunity to build to meet your specific needs. However it is timeconsuming, detailed, and reliant on 3 rd parties. Home purchase allows the acquisition of an existing structure. (someone else dreams, repair can be costly) Each has the advantages and disadvantages Mortgages approved by financial institutions have a list of approved appraisers and inspectors. They will be needed at each stage of construction. Additionally the inspectors will be paid a fee at the end of each phase to approve the release of the funds to contractors. Those fees are not included or mentioned in your mortgage disbursements. ($200-300 per stage payment usually 5 stages) Choosing contractors is a very important part of the building process. Contractors should all have risk insurance if they are bidding to build your home. Banks usually list this as a pre-requisite. Do not entertain any contractor who mentions the phrase mobilization, if they do not have money to start they definitely do not have money to finish. Pricing all items and sticking to the budget (construction & renovating) Contractors may select fixtures and equipment at certain prices. Your selection may exceed the quotes hence you will have to contribute any difference.