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From Acorn

Question 1: What are some of the primary questions asked in determining whether to buy or rent a house? How do lenders determine what you can afford? What is a down payment? What percentage of a house should it be? What does it mean to rent with the option to buy?

Jdefeo@conncoll.edu

Aolt@conncoll.edu

When an individual is financially self-sufficient and ready to take the world head on, one might decide it is the proper time to spread this new found independence further. Deciding to buy or rent a house could possibly be the next step to asserting ones independence. However, this is no simple task! One must weigh numerous options, problems, questions, costs, and other factors that influence whether or not a person buys or rents a house.

There are many questions asked in the process of buying and renting a house. A few of the primary questions asked in determining whether to buy or rent are: How does one know if they are ready? How does one begin the process of buying or renting a home? How does purchasing a home compare with renting? How does the lender decide the maximum loan amount that one can afford? How does one select the right real estate agent? How does one determine their housing needs before they begin the search? (http://www.hud.gov/offices/hsg/sfh/buying/buy/buyhm.crm) Many new buyers and renters face these questions. It is important to know what one is looking for and what one can afford in a market.

Lenders are people who give loans to people for a particular period of time, in this case, for buying or renting a home. The lender considers your debt-to-income ratio. This is a comparison of a person’s total income without tax to housing and non-housing expenses. Non-housing expenses include car loans, tuition, and other various expenses. Also, lenders go to Experian, Equifax, or Trans Union credit bureaus and look into ones finical credit score to determine if one is applicable for renting or buying a house.

Once a prospective buyer or renter is sure about their decision, they must make a down payment. A down payment is a percentage of the total cost required for the house paid upfront. Most lending companies require a minimum of 20 percent of the sales price for down payment. Depending on the company, one may find a lower percentage needed to be paid. If buying a house is too costly at the time the prospective buyer is considering acquiring a house, renting a house is a more likely option. However, they might find over time that their economic welfare has increased, and are now able to purchase a home.

If such a case arises, one might find it in their best interest to rent with the option to buy. This is usually a written agreement (contract) with a home owner and the new tenant. “In this contract, a person rents a home from its owner and lives in the home as a tenant until he or she exercises the option to purchase the home and become the new owner.” (http://www.mortgagenewsdaily.com) This rent can be put towards a purchase in the future. Under this contract, the home owner cannot sell the house to another individual without first offering it to the renter. These contracts tend to vary with different owners and tenants depending on certain clauses and other factors. Some examples of this are that the renter could pay a non refundable lease option deposit. Also, the contract could be drafted so that there is only a certain time period before given the option to buy or find a new residence. Once again each individual contract is different between the owner and tenant’s specific needs.

In conclusion, there are numerous variables when deciding whether or not to buy or rent a house. It is not a simple decision! Simple questions need to be answered in order for the perspective buyer or renter to be able to make a decision. One needs to be familiar with the financial terms and agreements that are made possible by lenders. Also, one needs to be aware of their situation in the long run and if buying is a reasonable option.

“Common Questions.” US Department of Housing and Urban Development. 28 Oct 2007 <http://www.hud.gov/offices/hsg/sfh/buying/buy/buyhm.crm>

“How Does Rent With Option To Buy Work?” Mortgage News Daily. 11 Sept 2006. 

28 Oct 2007 <http://www.mortgagenewsdaily.com/wiki/Rent_With_Option_To_Buy.asp>

Question 2: What is involved with the mortgage application process? What types of questions are typically asked? Include in your discussion assets, debts, credit rating. What does preapproval mean? Ryan.riffe@conncoll.edu The first part of the application process for applying for a mortgage is filling out the application form. In this form, they will ask questions about the applicant, their work, the house that they are interested in buying, and other questions of this sort. Once the applicant has filled this out the lender needs information regarding income, debts, and personal monthly expenses. By having this information, they will be able to get an idea of the applicant’s ability to pay back the mortgage. If one does not have a great credit history, the lenders can reject an application for a mortgage. They can tell this by going to the credit bureau and checking on whether or not one has paid ones bills on time. This is not really a question, but one might like to look into their credit history before they apply for a mortgage to make sure that everything is correct. Overall there are three main credit agencies. They are Trans Union, Equifax, and Experian. Depending on where you live when you apply for a mortgage, the credit report goes through one of these three agencies. Once all this happens, the lender will ask how much money the applicant would like the loan to be. Some questions involved in this part are for example, how high the loan can go. The answer to this depends. The amount of the loan depends on how much the property is worth and your financial background. The lenders hear an appraisal on the house once the applicant has been officially accepted for a mortgage. The lenders will give the person applying for the mortgage a certain percentage of the appraised value. That is usually 80 to 90 percent and then they want a down payment of the difference. Another question that could be asked is what happens if a proposal is turned down. If this were to happen, the lender must write you a letter giving you all the reasons that is was turned down. The three main reasons most people’s applications are turned down are the lack of a down payment, if you have poor credit history, and if the appraised value of the house is too much for the person to afford (Mortgage Process). There are four characteristics involved in mortgages: assets, debts, credit rating, and preapproval. In general, assets are anything an individual owns that has economic value (Mortgage Definition). This may include a car, stock, or real estate. In the accounting perspective, real estate is considered a long-term asset. Long term assets can be defined as an individual’s possessions that are expected to exceed more than one year (Mortgage Definition). When dealing with a mortgage, the term mortgage debt will sometimes occur. Mortgage debt is created through a mortgage and protected by the mortgage property. The credit bureau creates a ranking based on a detailed analysis. This is known as a credit ranking. Credit rankings are used for debt and financial background check-ups. Mortgage preapproval involves the application and approval for a mortgage prior to selecting a house. There is no bounding commitment for either the applicant or lender. There are five main advantages for a preapproval: saves time so that the person will find the best house for them, allows someone to spend more time finding the best home, helps the buyer gain confidence, increases negotiation power, and experiences a faster closing period(Weintraub). Kratovil, Robert; Werner, R. (1981). Modern Mortgage Law and Practice, 2nd, Prentice-Hall, Inc., Sec 1.6. ISBN 9780135957448. "Mortgage." BNET Business Dictionary. 2007. CNET Network Business. 30 Oct. 2007

    <http://dictionary.bnet.com/definition/Mortgage.html>. 

“Understanding the Home Mortgage Process.” The Federal Reserve Board. 18 Jun. 2007 http://www.federalreserve.gov/Pubs/mortgage/MORBRO_2.HTM

Weintraub, Elizabeth. "Loan Preapproval - The Advantages of Loan Preapproval." Home Buyin/Selling. About.com. 10 Nov. 2007 <http://homebuying.about.com/od/financingadvice/a/ advofpreapprova.htm>