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					home ownership
UNIT 5: HOME OWNERSHIP
table of contents


KEY TERMS .................................................................................................................. 2


FUNDAMENTALS .......................................................................................................... 3


BUYING A HOME .......................................................................................................... 4


SELLING YOUR HOME ................................................................................................ 13


RESOURCES ............................................................................................................... 18




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UNIT 5: HOME OWNERSHIP
key terms


Annual percentage rate (APR): Annual interest rate. Use this number to compare loan rates.


Closing costs: Charges for obtaining the loan and transferring the real estate title. These costs
are in addition to the price of the property and interest. These must be paid before escrow closes.


Fixed-rate mortgage: Home loan with an interest rate that stays the same throughout the term of
the loan.


Impound account (Escrow): A holding account to which the buyer makes monthly payments
to the lender for homeowner’s insurance and property taxes. The lender then pays these bills
when they are due. There is no charge for this service, and the impound payment is part of the
monthly mortgage payment.


Interest rate: The yearly charge for borrowing money. This varies among lenders.


Lock-in option: A guarantee that you will receive the interest rate quoted at the time of the
application if the loan closes before the lock-in expires. Lock-in rates are usually good for a set
time, such as 60 or 90 days.


Prepayment penalty: A fee charged for paying off a loan before the end of the term.


Points: Fees charged for the use of the loan (in addition to the interest). One point is equal to
1 percent of the loan amount. For example, two points for a $100,000 loan equals $2,000.


Qualifying ratios: Formulas used by lenders to determine the maximum loan amount an
applicant can afford to repay.


Term: The period for the loan repayment, typically 15 or 30 years.


Variable or adjustment rate mortgage (ARM): A real estate-secured loan that has an interest rate
that can change during the term of the loan.




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UNIT 5: HOME OWNERSHIP
fundamentals


Owning a home is a big part of the American dream. Buying or selling a home is perhaps one of
the most significant financial transactions you can go through. It marks a rite of passage, or as
financial author and television host Suze Orman says, “Owning a home is a keystone of wealth
… both financial affluence and emotional security.”

To make the American dream a reality, there are a number of things to consider, including the
basic question: Is owning a home right for me?

In this module, we will cover:

• The processes of buying and selling a home.

• The advantages and disadvantages of home ownership.

• How to pay for or finance a home.

• The variety of available loan programs for teachers.

When you own a home, the good comes with the bad. The adage “be careful what you wish for”
can apply in this context. There are several advantages and disadvantages for you to consider
when thinking about buying a home.

What are some advantages to owning a home?

• It provides numerous tax benefits.

• It represents a significant financial asset and investment, and contributes significantly
  to your total net worth.

• Homeownership can help serve as a hedge against inflation.

What are some disadvantages to owning a home?

• Home maintenance and repair costs can add up.

• You have decreased mobility (unless, of course, the house is on wheels).

• You risk foreclosure if you fail to pay your mortgages on time.

• Housing market prices can swing significantly, thereby risking a reduction in the home’s
  market value.




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UNIT 5: HOME OWNERSHIP
buying a home


WHAT CAN YOU AFFORD?
The basic questions about home ownership often come down to how much of a mortgage can
you afford. In today’s economy, it’s common for mortgage lenders to require a 20 percent down
payment when applying for a mortgage. Documentation and risk management procedures
at lenders have strengthened and tightened since 2008. Along with more rigorous mortgage
application and approval procedures come tighter credit and lending practices. Taken together,
these factors bring the question about how much of a mortgage you can afford front and center.

Financial planners and lenders recommend that monthly mortgage payments should not
exceed 25 percent of your take home pay. A bank often limits your monthly mortgage payment
(including taxes and insurance) to no more than 28 percent to 36 percent of your monthly gross
income. Where you fall on that scale depends upon the size of your down payment and your
credit score. The higher monthly payment the bank allows, the bigger the loan you may qualify
for. This 28- to 36-percent measure is called the housing ratio.


PRE-QUALIFIED VS. PRE-APPROVED
If possible, have a lender pre-qualify you for a mortgage. This will tell you how large of a
mortgage you could qualify for, assuming 80 percent loan-to-value ratio, where your mortgage
amount typically does not exceed more than 80 percent of the home price. To get pre-qualified,
you provide the lender with information about your debt, income and assets. The lender then
tells you the mortgage amount for which you may qualify.

Then you need to undergo the pre-approval process. This involves filling out a mortgage
application and providing documents for a check of your financial background and credit rating.
The lender will then tell you the mortgage amount for which you are pre-approved. This allows
you to lock in a specific interest rate. With pre-approval, the lender will give you a written
conditional commitment for an exact loan amount.


BUYING COSTS
As a potential homebuyer, there are several up-front costs you are responsible for, including:

• Down payment (typically 20 percent of the total home price).

• Mortgage application fees (e.g., credit check, application processing).

• Closing costs (e.g., attorney’s fees, taxes).

• Moving expenses.

• Hook-up costs (e.g., electricity, water).

• New furniture, carpeting, paint, etc.




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The standard down payment for a house is usually 20 percent of the purchase price in cash.
The amount secures the borrower to the house because the borrower will forfeit all the down
payment should he or she default or is unable to pay off the mortgage. In that case, the lender
probably could sell the property for only 80 percent of its value and still break even. This 20
percent down payment also gives the new owner an initial 20 percent equity in the home.

The mortgage application fee covers the costs for processing the loan application and running
credit checks. Usually, you must pay the fee at the filing time. If your loan application is rejected,
this fee is often not refunded. If you back out of the application process, you also do not receive
a refund. The application fee is one of several items called closing costs. Other closing costs
include paying for handling of the paperwork by the title company, a survey of the property and
the recording of the property deed.

Unless you do it yourself, you will also need to pay movers to haul your belongings to your new
home. Additional costs are incurred when connecting utilities, Internet, cable television and
telephone. These are often referred to as hook-up costs and are paid by the buyer directly.


PURCHASE CONSIDERATIONS
When you are in the market for a home, review your own particular circumstances to figure out
what kind of property interests you. Considerations such as a new home vs. an older home, a
townhouse vs. a multifamily unit, a primary residence vs. a vacation residence. You may also
want to be near a school, health care facility, transportation hub or a place of employment. Each
has its pros and cons. Only you can make the right housing choice for yourself. It will depend on
your needs and preferences, the amount of money you have to spend and the housing available
in your area.

To help you decide which is right for you, review the following options when looking for a home:

• Market value of the home: Is it overpriced? Underpriced?

• Location—as in “location, location, location!”

• Condition of the home (structure, exterior, interior, appliances).

• What you can afford (your pre-approval amount).

• How will you finance (type of financing you will use).

• Special circumstances (location or amenities you need).

Prior to signing the purchase agreement for the home, inspect the condition of the property. This
involves conducting a walk-through to check for such things as mold and plumbing problems.
Find out how to control the yard sprinklers and where the light switches are for the attic, among
other things.




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California requires the seller to provide a transfer disclosure statement to a buyer. The statement
should list known defects, such as water problems and roof damage. Note, however, that sellers
are not warranting the condition of the home; sellers are simply disclosing its condition. If a
seller does not disclose a known problem, the buyer could sue.

When you make an offer on a home, you want it to be fair and to encompass the extras you may
want in addition to the home itself, such as a home warranty, window coverings, etc. This will
help you decide on the right offer amount.


PAYING FOR YOUR NEW HOME—FINANCING OPTIONS
In most cases, consumers do not pay cash for homes. Most owners have financed their homes
through a mortgage lender. Good credit is essential to securing a mortgage on reasonable terms,
including a lower interest rate. The interest rate is one of the ways in which a lender establishes
the riskiness of lending to you. Typically, the better you are as a credit risk, the lower your
interest rate. This is not an absolute, however.

There are two types of basic mortgage interest rates: fixed-rate and variable-rate mortgages.

A fixed-rate mortgage is exactly that: The mortgage rate is fixed over the period of the loan; 30
years is a common term. If you are buying a $300,000 home, you would put 20 percent down—
or $60,000—and take out a mortgage on the remaining $240,000. If you obtained a loan at
4.75 percent interest, your monthly payments—principal and interest—would be about $1,252.
Note that over the life of the $240,000 loan, you would be paying a total of $450,705—of that
amount, $210,705 is interest payments.

It might be to your advantage to apply for a 15-year loan. Such loans usually have lower interest
rates than 30-year loans, but they also have much larger monthly payments. Yet, over the
course of the loan, you will be paying far less than the total paid for a 30-year fixed mortgage.
Mortgage interest rates vary with market conditions. Check with several lenders to find the one
that is right for you.

An adjustable-rate mortgage (ARM), sometimes called a variable-rate loan, is a loan in which
the interest rate fluctuates on a fixed-time basis, according to an index. In many cases, the
fixed-time basis is yearly. An ARM starts with a lower interest rate than a comparable fixed-rate
mortgage. Before the current recession, variables were popular because people could purchase
a much larger house than they could have afforded with a standard fixed-rate mortgage.
Adjustable-rate mortgages, however, are a gamble because interest rates can go up and down.
You may want to consider an ARM if you think interest rates will decline, you will move in
a few years or you believe you can pay off the mortgage before the interest rate becomes too
onerous. Regardless, before you consider an ARM—or any major loan, for that matter—you
might want to consult a financial adviser, such as a CPA, to get an objective opinion regarding
whether or not the loan is in your best interest.




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The annual percentage rate (APR) estimates the actual interest you will pay during the year and
is a better indicator of the true cost of a loan than just the mortgage loan rate. That’s because
the APR considers other fees, such as discount points, origination fees, mortgage insurance
premiums and prepaid mortgage interest in its calculation. These are up-front costs that you pay
at the start of the loan, and the APR factors in those costs over the length of the loan. Lenders
are required to provide you with the APR along with the mortgage loan interest rate.


ADDITIONAL DETAILS ABOUT MORTGAGE FINANCING OPTIONS
Fixed-rate mortgages. As mentioned above, this is the granddaddy of all mortgages. Today’s
options include 10-, 15-, 20-, 30-, 40- and even 50-year fixed-rate mortgages, all of which are
completely amortized.

FHA loans. FHA mortgage loans are insured by the government through mortgage insurance
that is funded into the loan. First-time homebuyers are ideal candidates for an FHA loan because
the down payment requirements are minimal.

VA loans. This type of government loan is available to veterans who have served in the U.S.
armed forces and, in certain cases, to spouses of deceased veterans. The requirements vary
depending on the year of service and whether the discharge was honorable or dishonorable.
The main benefit to a VA loan is the borrower does not need a down payment. The loan is
guaranteed by the Department of Veteran Affairs, but funded by a conventional lender.

Interest-only mortgages. Calling a mortgage loan type an interest-only mortgage is a bit
misleading because these loans are not really interest only, meaning the borrower pays
only interest on the loan. Interest-only loans contain an option—available only for a certain
period—to make an interest-only payment. However, some junior mortgages are indeed
interest only and require a balloon payment, meaning the full loan balance must be paid in a
lump sum at maturity.

Adjustable-rate mortgages. These come in many varieties. The interest rate fluctuates and can
move up or down monthly, semi-annually, annually or remain fixed for a period before
it adjusts.

Option ARM mortgages. Option ARM loans are complicated. They are adjustable-rate
mortgages, meaning the interest rate fluctuates periodically. As the name implies, borrowers can
choose from a variety of payment options and index rates. However, beware of the minimum
payment option, which can result in negative amortization.

Combo/piggyback mortgages. This type of mortgage financing consists of two loans: a first
mortgage and a second mortgage. The mortgages can be adjustable-rate, fixed-rate or a
combination of the two. Borrowers take out two loans when the down payment is less than 20
percent to avoid paying private mortgage insurance.




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Mortgage buydowns. Borrowers who want to pay a lower interest rate initially often opt for
mortgage buydowns. The interest rate is reduced because fees are paid to lower the rate, hence
“buydown.” Buyers, sellers or lenders can buy down the interest rate for the borrower.

Bridge, or swing, loans. These types of mortgage loans are used when a seller has put a home
on the market—but it has not yet sold—and the seller wants to borrow equity to buy another
home. The seller’s existing home is used as security for a bridge (also called swing) loan. This
sometimes happens when a seller has to relocate because of a job change.


PRIVATE MORTGAGE INSURANCE (PMI)
If you cannot offer a 20 percent down payment, but can find a lender willing to loan you more
than 80 percent of the home’s value, your lender will require you to pay for private mortgage
insurance. The insurance protects a lender against loss if a borrower defaults on a loan. With
PMI, you could buy a home with as little as a 3 percent to 5 percent down payment. This means
that you can buy a home without waiting years to accumulate a large down payment. PMI
payments usually end when the principal you owe drops to 80 percent of the property’s market
value. In the current economic environment, this type of option is less and less available to all
but the most creditworthy individuals.


MONTHLY MORTGAGE PAYMENT STRUCTURING (PI OR PITI)
You can structure your monthly mortgage payment in two ways: Pay principal and interest on
the principal (PI), or you can pay principal, interest, a prorated amount for property taxes and
a prorated amount for homeowner’s insurance (PITI). Homeowner association dues, if any, can
also be included in the mortgage financing. The amount you pay in taxes and insurance is held
in escrow until they are actually due. Many buyers like having taxes and insurance rolled into
the mortgage payment as these items are automatically paid, and the buyer is not hit by a big
bill when taxes and insurance payments come due. However, by paying taxes and insurance on a
monthly, prorated basis, you are losing the use of that money until those payments are actually
due. If you just want to pay principal and interest as your monthly mortgage payment, you
have to waive escrows at the time your loan is approved. Doing so may add a small fee to your
closing costs, however.




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AVOID THESE RISKY PRACTICES
Risky practices to be aware of:

   Wiping out your savings
   Avoid scraping together every cent for a down payment on your home. Refrain from
   borrowing money from relatives to pay closing costs. Short on funds? Don’t say that you’ll
   make it up out of next week’s paycheck and withdraw cash on a major credit card. Resist
   charging all home repairs and future maintenance to your credit card. If possible, refrain
   from cashing in your retirement accounts—even if retirement seems a long way off.

   Refusing professional advice
   In what is for most people the largest financial transaction of their lives, what you don’t
   know can hurt you. Recognize and leverage the knowledge and expertise your agent or
   mortgage broker have. They are working for you … and their commissions. Don’t think that
   you can go this alone.

   Choosing exotic financing arrangements
   You may be tempted by what are seemingly attractive financing arrangements to get you
   hooked and in the door of the local bank branch. But buyer beware, as the adage goes.
   Don’t just focus on a lower monthly payment that might be possible because of some
   complex structure of your home financing. Make sure you understand the impact of such
   arrangements, particularly as years go by and economic factors change, such as interest
   rates. Appreciation is not the only way to build equity in a home; you need to pay down the
   principal balance of your loan in addition to making interest payments. Beware of financing
   at the lowest interest rate initially, even if it means the rate will adjust later. Pay close
   attention to a Good Faith Estimate—it’s more than just jargon. If you don’t understand the
   terms of your loan, ask your agent or mortgage broker—remember, they work for you.
   Know key terms and features, including APR, interest-only, indexes, margins, caps or
   negative amortization.

   Picking wrong neighborhoods
   The three most important words in real estate are “location, location, location.” Driving
   through a neighborhood will often tell you everything you need to know about an area. Ask
   the local police department about crime statistics; talk to neighbors before you buy; check to
   see if any environmental issues exist in the neighborhood; examine the school system; look at
   the other homes or businesses on your street or block. Many of these issues can affect your
   market value. There may be a reason the home you are looking at is priced well below other
   similar homes you have considered in different neighborhoods.

   Choosing the most expensive home in the neighborhood
   You may want to buy the largest and most expensive home in the neighborhood (and one
   you are pre-qualified to purchase). Although the bank may have pre-approved you for a
   certain loan amount, you need not use every bit of that amount. Consider a compromise in
   your search for a home. Perhaps you need fewer bedrooms or less square footage. Buy what
   works for you, but don’t over buy.




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   Passing up home inspections
   Home inspections are well worth the money and time spent. Trained professional home
   inspectors know the signs to look for in a home. Not all problems are visible on the surface,
   nor are they apparent to the untrained eye. If there are problems, they can be identified
   before you buy the home, avoiding costly litigation and repairs.

   Altering financial situation before closing
   While waiting for loan funding, avoid doing things that will negatively affect your financial
   position. Skip the buying spree for new TVs, furniture and appliances. Focus on your
   core financial position to make sure you can afford the home you are buying and, more
   importantly, so the lender can see you can afford the property.


EDUCATOR-SPECIFIC INCENTIVE PROGRAMS
To finance your home, you will need to go through a lender. Conventional lenders include banks,
credit unions or savings and loans. The FHA is another loan source you can use if you meet
minimum standards. There are several programs and incentives for educators that offer a tax
credit or reduced loan rate to aid in the purchase. Income level and being a first-time buyer vs.
previous purchaser may factor into qualifications for the various programs.

CalSTRS Home Loan Program (www.calstrs.com/help/faqs/hlpfaqs.aspx)

• Specifically for teachers.

• Refinance existing home or purchase a new home.

• New home mortgage loan amounts available up to $834,000.

• Fixed interest rates.

• 80-17 mortgage loan program.

HUD Good Neighbor Next Door (www.hud.gov/offices/hsg/sfh/reo/goodn/gnndabot.cfm)

• For full-time pre-kindergarten through 12th-grade teachers, as well as law enforcement
  officers and firefighters and emergency medical technicians.

• Substantial incentive in the form of a discount of 50 percent from the list price of the home.

• Must commit to live in the property for 36 months as your sole residence.

• Must purchase within the school district.

California Housing Finance Agency (www.calhfa.ca.gov)

• Below-market interest on first loan.

• Fall within the income limits.



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THE FINAL STEPS TO BUYING A HOME
Loan-processing steps you need to undergo include:

• Property appraisal.

• Credit report.

• Lender checks facts.

• Lender approval.

• Commitment letter.

Once you have made a bid on your house and had your loan processed, it is time to close the deal!

• Select the date.

• Select settlement of escrow.

• Complete inspections.

• Secure homeowner’s insurance.

• Decide type of ownership (single man/woman, unmarried, married, etc).

• Secure home warranty.

• Final walk through.

• Closing cost estimate

Next are the final exchanges:

• Documents.

• HUD-1 settlement statement.

• Truth-in-lending statement.

• The note.

• The mortgage.

• Affidavits.

• The deed.




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… and the final costs:

• Lender fees.

• Advanced payments (insurance, interest).

• Recording fee, title changes.

• Escrow fees.

The last steps in closing the deal are obtaining record documents and receiving the keys to your
new home!

There are numerous steps in purchasing a new home and many factors affecting the outcome. As
a review, when asking yourself if home ownership is right for you, consider:

• The advantages and disadvantages of home ownership.

• How you will finance the home?

• Which of the loan programs available for teachers or educators may be right for you?




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UNIT 5: HOME OWNERSHIP
selling your home


As with the buying of a home, there are many steps to take when selling your home.

You want to position your home in the most appealing, attractive way possible so that buyers
will be interested. In your deliberations about what to change, you should consider the addition
or removal of furniture, making certain repairs to the home, renovations for which you feel you
can recoup a significant part of the cost (e.g., upgrades to kitchens and bathrooms) and anything
else, such as landscaping or paint that will help you stage your home for sale.

American home owners sell and move, on average, every five to seven years, so this is a common
process that many people will likely undergo at some point.


MAKING REPAIRS BEFORE SELLING
Quick fixes before selling a home often pay off. The trick is to figure out which repairs will bring
the greatest return. This often depends on:

• Time of year

• Location of the home

• Market conditions and values

• Competing inventory in your local market

Although there is no hard and fast rule, you can follow some general guidelines that apply to
most homes. The National Association of Realtors publishes an annual “Cost vs. Value Report”
with Remodeling Magazine. The report features home project costs and returns in four regions
and includes a national average. Quick fixes with better pay-offs cited in the report typically
include flooring fixes, painting of ceilings and walls, wallpaper, wood paneling, textured ceilings,
kitchen improvements, updated cabinets, replaced counter tops, new sinks and faucets, updated
bathrooms, renewed roofs and updated exteriors.

Many buyers hope to buy a home that will not require any major immediate maintenance or
expenditures, including new appliances, updated plumbing, electrical and heating.


STAGING YOUR HOME FOR SELLING
Home staging goes beyond the usual decorating and cleaning. It is more about creating a perfect
“mood” for the buyers, making your home appear bigger, brighter, newer, cleaner, warmer, more
modern and irresistible. Staging also means eliminating personal items like family photos so
buyers can envision their own belongings there. Bottom line: it’s about presenting your home in
the best possible way to increase the likelihood of a sale.




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GENERAL HOME INSPECTION CHECKLIST
Selling a home requires a home inspection. Sellers need to know what the buyer’s inspection
reports will review. Checklist items include structural elements, such as construction of walls,
ceilings, floors and foundation. Exterior evaluation includes wall coverings, landscaping,
grading, elevation, drainage, driveways, fences, sidewalks, trim, doors, windows, lights and
exterior receptacles. Other items include the roof and attic, plumbing and components (water
heaters, furnaces, air conditioning, duct work, chimney, fireplace and sprinklers), electrical,
garage and appliances such as dishwasher, range and oven, built-in microwaves, garbage disposal
and smoke/radon/CO2 detectors. Home inspection reports do not describe the condition of
every component if it is in acceptable condition. However, it should note item that are defective
or needing service. More serious problems could include:

• Health and safety issues (e.g., mold, faulty wiring).

• Roofs with a short life expectancy.

• Furnace or air conditioning malfunctions.

• Foundation deficiencies.

• Moisture or drainage issues.


PRICING YOUR HOME TO SELL
The single most important factor to consider when selling your home is the price. To do this,
you need to figure out how much your house is worth. You want to avoid overpricing the
home because you will lose the freshness of the home’s appeal after the first few weeks. After
21 days, demand and interest typically decline on new listings. The dynamics of house pricing
are interesting … and sometimes counterintuitive. Case in point: Do not worry about pricing
your home too low because homes priced below market value often receive multiple offers,
which drive up the price to market level. Pricing is about supply and demand in your market,
and it is part art (e.g., staging your home) and science (e.g., understanding the market).


PULL COMPARABLE LISTINGS AND SALES DATA
Review every similar home that was or is listed in the same neighborhood over the past six
months. The list should contain homes within a quarter- to a half-mile and no further, unless
there are only a handful of comparables, or “comps,” in the area. As you pull this information,
pay attention to neighborhood dividing lines and physical barriers, such as major streets, freeways
or railroads. Look at homes with similar square footage and age as yours. Pull history for expired
or withdrawn listings, or relisted homes. Next, compare original list prices to final sales prices to
determine any price changes. Compare final sales prices to actual sold prices to determine ratios.
Look for any patterns as to why homes did not sell to help you avoid any pitfalls in your sale.




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WORKING WITH REAL ESTATE AGENTS
You can decide to sell your home yourself or to work with a qualified real estate professional. A
good real estate agent can make or break your deal. You want to hire the best real estate agent
you can find, which means hiring one who will put your interests first.

All agents are different; they charge varying rates; they specialize in certain areas; they often use
a variety of marketing techniques; and possess particular skill sets—all of these factors help set
them apart and should be considered in your selection.

The best matched agent for you does not necessarily work at the largest or most well-known
brokerage, nor is he or she necessarily the top producing seller at the firm. The best agent for
you is an experienced professional who will listen to you, conduct himself or herself in an ethical
manner and understand your market.

Consider using a licensed professional. All Realtors are licensed to sell real estate as an agent or
a broker—however, not all real estate agents are licensed Realtors. Make sure you understand
the difference. Visit the National Association of Realtors at www.realtor.org for more
information about licensed professional Realtors.


LISTING YOUR PROPERTY
Once you have found the right real estate agent for you, you are ready to think about listing
your home. There are several types of listing agreements. Familiarize yourself with the most
common ones:

• Open listing.

• Exclusive agency listing.

• Exclusive right-to-sell listing.

Other terms and conditions to consider in your listing agreement include length of the listing,
selling commission and cancellation terms in the contract.


REAL ESTATE COMMISSIONS
To understand who pays real estate commissions—whether it is the seller, buyer or both—
first you must understand how agents are paid for the transactions. Ask your agent directly.
Typically, real estate agents work for a licensed real estate broker, whereby all fees paid to a
real estate agent must first pass through the broker. Only the licensed real estate broker can pay
commission to an agent and sign a listing agreement with a seller.




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SELLING YOUR HOME YOURSELF
If you decide not to work with a real estate agent, you also have the option of selling the home
on your own—known as “For Sale By Owner” (FSBO). Even with today’s technologies and
Internet access, finding buyers is the greatest challenge for FSBOs. The National Association of
Realtors reports that the majority of FSBOs ultimately end up listing with a Realtor because of
this challenge, as well as a lack of marketing knowledge and real estate expertise.


SHORT SALES AND FORECLOSURE
Sellers who stop making mortgage payments—and those headed into default who cannot refinance
or work out financing alternatives with their lenders—have a few options: sell the property before
foreclosure is final, give a deed-in-lieu of foreclosure to the bank or let the bank take the property
in foreclosure. Buyers and investors often negotiate with the bank on short sales before foreclosure
is complete, especially if the home is worth less than the outstanding mortgage balance.


OWNER FINANCING
Not all lending to buyers is done through a bank. In tough markets, buyers often ask sellers to
help finance their purchases. Owner financing may attract more buyers, and sellers have a variety
of financing instruments from which to choose, including home equity and bridge loans. Owner-
financed transactions are negotiable between buyers and sellers, subject to any usury laws to
prevent gouging on interest rate terms. While there is no standard down payment required vis-à-
vis the 20 percent practice, many sellers want a sufficient down payment to protect their equity.
Down payments can vary from small amounts up to 30 percent or more.

   Benefits of owner financing to sellers
   Higher sales prices. Because the seller is offering owner financing, the seller may be in a
   position to command full list price or higher.

   Tax breaks. The seller might pay less in taxes on an installment sale, reporting only the
   income received in each calendar year.

   Monthly income. Payments from a buyer increase the seller’s monthly cash flow, resulting in
   disposable income for the seller.

   Higher interest rate. Owner financing can carry a higher interest rate than a seller might
   receive in other types of investments.

   Shorter listing term. Owner financing attracts a different set of buyers. If a property is not
   selling under conventional methods, offering owner financing is one way to stand out from
   other inventory and move a hard-to-sell property.

You may want to consult a real estate attorney to obtain legal advice prior to entering owner-
financed agreements.




                       Financial Smarts for Teachers • Unit 5: Home Ownership
                                                5–16
POSSESSING/VACATING THE HOME—A BALANCING ACT
The single biggest challenge in most real estate transactions is when possession or vacating needs
or circumstances change part-way through the transaction. In some cases, those needs were
not clear from the beginning. In others, the expectations of both buyer and seller were, in fact,
different. Be sure that this is clear between you and your buyer before you get too far along in
the process. Local custom will dictate how the buyer asks for possession, but it is typically an
issue agreed upon at purchase contract acceptance. It is common for a buyer to receive keys
on the day the transaction closes. In some parts of the country, buyers give the sellers a day or
two after closing to move out of the property. Sometimes sellers rent back from the new buyers.
Whatever you agree to, make sure it is clearly stated in writing.


MARKET CONDITIONS ALSO DICTATE POSSESSION
In a seller’s market, buyers will often give sellers several days to move out of the property at
no consideration to the buyer. This is often done by the buyer to gain an edge in the event the
seller receives multiple offers. In a buyer’s market, buyers will generally insist upon occupancy
at closing and have been known to refuse to close if the property is not going to be vacant at
closing. In more neutral markets, possession is typically taken by the buyer upon closing.




                       Financial Smarts for Teachers • Unit 5: Home Ownership
                                               5–17
UNIT 5: HOME OWNERSHIP
resources


California Association of Realtors
www.car.org
Home to the California Association of Realtors, this site offers real estate news and information.

California Housing Finance Agency
www.calhfa.ca.gov
The California Housing Finance Agency (CalHFA) supports renters and first-time homebuyers
through financing and programs that create affordable housing opportunities for low- and
moderate-income Californians. The site provides information about home loans and down
payment assistance programs.

CalSTRS Home Loan Program
www.calstrs.com/homeloanprogram
This portion of the website of the California State Teachers Retirement System (CalSTRS)
provides information about the CalSTRS Home Loan Program.

Ginnie Mae: Guide to Owning Your Own Home
www.ginniemae.gov/ypth/index.asp?section=ypth
This portion of the website of the Government National Mortgage Association (Ginnie Mae)
has a calculator to help you determine if you can afford to purchase a house and provides
information on how to buy a home and work with lenders.

Housing and Urban Development’s Good Neighbor Next Door Program
www.hud.gov/offices/hsg/sfh/reo/goodn/gnndabot.cfm
This website offers information about HUD’s Good Neighbor Next Door initiative, which is
designed to encourage renewal of revitalization areas by providing law enforcement officers,
firefighters, emergency medical technicians and teachers an opportunity to purchase homes in
these communities. HUD provides a substantial incentive in the form of a 50 percent discount
off the list price of eligible properties.

National Low-Income Housing Coalition
www.nlihc.org
The website of the National Low-Income Housing Coalition provides information and
resources for people with the lowest incomes in the United States so they can have affordable
and decent homes.

National Association of Realtors
www.realtor.org
Although primarily for real estate agents who are members of the National Association of
Realtors, the site provides information for how to sell and how to buy a home.

Stop Financial Fraud
www.stopfraud.gov/protect-mortgage.html
This is the website of the Financial Fraud Enforcement Task Force, founded in November 2009
to hold accountable those who helped bring about the last financial crisis and to prevent another
crisis from happening. Learn what constitutes fraud and report suspected fraud here.




                       Financial Smarts for Teachers • Unit 5: Home Ownership
                                               5–18

				
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