Financial Literacy Series
Home Ownership – The Dos and
Don’ts
February 27, 2020
Elbert Thompson, MBA, BRI, CRS, CIPS
www.cfasociety.org/bahamas
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Agenda
• Pre-home ownership assessment
• Selection criteria
• Building vs. buying
• Financing your home
• Closing the deal
• Home construction and maintenance
• Q&A
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Pre-home ownership assessment
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Being prepared for home ownership
Dos
• Plan your strategy
• Get pre-qualified and
save
• List and visit properties
matching your criteria
and budget
• Assess and act!
• Save, save, save!
Don’ts
• Act impulsively
• Be indecisive
• Spend more than you
can afford
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Selection criteria
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Key determinants of a home purchase
• Location
• Topography
• Zoning
• Condition
• Price
• Utilities
• Closing costs
• Clear & marketable title– Attorney needed
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Building vs. Buying
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Buying an existing home
• Dos
– Use a BREA licensed real estate agent to represent you
– Buy early in the construction process so you can modify to your taste and negotiate savings
– Get an appraisal & home inspection
• Don’ts
– Just run after foreclosures
– Purchase a property without doing your due diligence on the area, quality of the construction
– Make deals with contractors/sellers you do not trust
– Involve too many cooks in your decision that don’t have the expertise for the decision
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Building a home
• Dos
– Choose a contractor
wisely – get references!
– Obtain building permits
and insurance
– Keep track of all
expenses
– Secure building materials
• Don’ts
– Drag on the building
process for too long
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Financing your home
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Making sensible financing decisions
Do’s
• Understand how a
mortgage works
• Determine what you can
afford
• Shop around or seek the
help of a mortgage broker
• Pay off outstanding credit
cards and loans if possible
Don’ts
• Take out unnecessary loans
• Exceed a debt service ratio
of 40%
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Fundamentals of mortgage financing
• Key definitions
– Down payment (Usually 5% or 10%)
– Principal
– Interest
• Types of mortgages
– Fixed rate: constant interest rate and periodic payments
throughout the life of the mortgage
– Adjustable rate mortgage: interest rate adjusts depending on
an index level (Prime +)
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How much of a mortgage can I afford?
• Debt service ratio
– Monthly debt payment divided by monthly income
– Limit your debt service ratio to 40%
– Example: if your monthly income is $3,000, your
mortgage should not be more than 1,200
• Mortgage indemnity insurance may be needed
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How a mortgage works
• Example:
– House price: $300,000
– $50,000 saved toward a down payment
– Interest rate: 5%
– Fixed rate mortgage
– Term of the mortgage: 25 years
– What will the monthly mortgage payment be?
• Mortgage calculator
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Where do I go to get a mortgage? –Banks, Credit unions, insurance companies, private
financing
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Closing the deal
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Closing costs to consider
• Bank mortgage origination fee
• Legal fees– 2-2.5% typically plus mortgage fee
• Government Transfer Tax (VAT) – Usually split between buyer and
seller
– First-time buyers may be exempt up to $500K
• Legal fees– Buyer and seller responsible for their
own fees plus VAT.
– First-time buyers may be exempt
• Mortgage indemnity insurance
• Real estate agent’s commissions – Vacant Land 10%; Developed
property 6%
– Usually paid by seller plus VAT
Amount Notes
Purchase price
$300,000.00
Down payment
$50,000.00
Mortgage $250,000.00
Bank fees $2,500.00 1% of mortgage
Legal fees $6,000.00 2%
Stamp tax $3,750.00 ½ of 2.5%
VAT $18,000.00 ½ of 12%
MDI $3,000.00 1%
RE agent commissions
$0.00 Paid by seller
Total closing costs
$33,250.00www.cfasociety.org/bahamas
Home construction and maintenance
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Understanding home construction process
• Architectural plans– Approval from town planning
• Insurance
• Contractor outlines sequence of home construction– Excavation/ clearing of property
– Foundation
– Belt course
– Roof
– Windows/ doors
– Interior
– Septic tank/ waste disposal
– Finishing
• Inspection by lender-approved Quantity Surveyor
• Issuance of Occupancy Certificate
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Ongoing expenses to consider
• Repairs and maintenance
– Create a budget line item, e.g. 1% of value
– E.g., plumbing, painting, roofing, appliances
• Home insurance
• Real property tax
– First time home owners exempt up to $250,000.00
• Home Owners Association fees
• Hurricane preparation
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Q&A
Thank you!
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Endnotes
• https://activerain.com/blogsview/2563816/first-time-buyers-in-harrisburg-pa--what-are-the-costs-
• https://bfsb-bahamas.com/providers/name/bank-of-the-bahamas-international/
• https://www.centralbankbahamas.com/download/039835000.pdf
• https://www.cibc.com/fcib/pdf/cibc-firstcaribbean-mistakes-home-buyers-should-avoid.pdf
• https://www.cibc.com/fcib/pdf/cibc-firstcaribbean-mortgage-document-checklist.pdf
• https://www.bankrate.com/mortgages/arm-vs-fixed-rate/
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