Home Buying in Kentucky

The median home price in Kentucky is $228,000 (almost $200,000 below the national average), but that can vary from one city to the next. Here are some specific examples of median home prices in different communities:

• Louisville is $289,000, but the median sold price is $247,000.
• Paducah is $279,000, but the median sold price is $236,000.
• Frankfort is $289,000, but the median sold price is $230,000.
• Lexington is $369,000, but the median sold price is $265,000.
• Bowling Green is $340,000, but the median sold price is $262,000.

When the sold prices are lower than the asking prices, it's a buyer's market. This means buyers are dictating the prices by paying much less than the sellers are listing homes. This often happens when there are more homes available than there are buyers.

While housing costs are low, the median household income in Kentucky is $60,000. That's probably not enough to qualify for a mortgage of $228,000 that comes with $1,700 per month payments. That's because mortgage lenders won't allow borrowers to take out loans that amount to more than 28 percent of their income. Unless the borrower can lower the mortgage amount with a 20 percent down payment or interest rates drop enough to lower the monthly premium well below $1,700, the median household income isn't enough to afford an average home.

More than 67 percent of Kentucky homes are owner-occupied, posing challenges for the real estate market. Owner-occupied units are a reason there's a shortage of homes for sale in many states. Long-term owners are less likely to sell when interest rates are high. If they sell, they would need to get a new mortgage at a higher rate and make higher monthly payments.

When budgeting to buy a new place, remember to consider utilities. In Kentucky, you're likely to save a little over the average American, who pays $473 per month for electricity, internet, and heat or cooling. The average cost of utilities in Kentucky is $416.

Homes in Kentucky have appreciated in value at about the average national rate of 6.5 percent per year. The amount of time you plan to live in Kentucky should determine renting vs. buying. After just 4.5 years, the average monthly rent in Kentucky is $1,400, and an investment in a median-price home is about the same cost. That's because mortgage payments on a $228,000 (median price) home at 6.5 percent interest are about $1,720 per month. If you stay longer than 5 years and can afford the payments, buying a home should reward you financially with equity – meaning your investment should have appreciated.

The peak sales season for real estate is summer when it takes an average of 30 days for a home to sell, but the time of year is important. In winter, it's not uncommon for homes to sit for two months or more before selling. If you have a down payment saved and have prequalified for a mortgage, you can move quickly when you find a good fit. A down payment of 20 percent is key, along with a good work history and a 600 or better credit score. (Your credit score can be lower if you have a 20 percent downpayment saved.) Paying off loans and making prompt payments on debts improves your credit score, which is based on your payment history and your income-to-debt ratio.

Kentucky law requires that sellers of residential properties must make a lengthy seller's disclosure about the past and current condition of the site, inside and outside. It covers things like:

• The age of the roofing materials
• Whether the basement or crawl space has ever leaked or held water
• If the property has been the site of a drug manufacturing laboratory and if it was certified as decontaminated
• If the property has been damaged by a storm
• Details about access and easements, including any homeowner's associations

The seller's disclosure is a good starting point for buyers and their home inspection team to determine the extent of any issues and the potential costs of necessary repairs. If major problems are revealed, the selling price of the property may be renegotiated. Your down payment should be contingent upon the property passing inspection without significant issues, and your mortgage company may also deny the purchase if significant issues appear on the property appraisal.

If you've narrowed your search area to a region that's a reasonable commute to work, a good school district, and the lifestyle you desire, consider hiring a real estate buyer's agent to help you make the most efficient use of your time and the right investment in housing.

A buyer's agent finds properties matching your desired location and amenities. They save time and effort in finding and purchasing a home, including help writing your offer and negotiating the price. Sometimes they also know about homes about to go on the market, giving you a slight advantage.

A seller's agent supplies important background information, such as a home's price history, the pros and cons of the area, and property taxes, to aid your decision-making. They also help find an inspector, renegotiate the price if there are issues, and keep the closing on track.

A new law says buyers must sign a contract with their buyer's agents. Instead of splitting the 5-6 percent commission with the seller's agent, buyer's agents now negotiate their commission. Their contract with you describes their role and payment.

The toughest part of buying a home is saving for a down payment and paying off debt. Getting a mortgage prequalification determines how much home you can afford.

Kentucky is more affordable than many states, but the state's $60,000 median household income is not quite enough to get a mortgage. The median home price is $228,000 – unless you have a significant down payment ready. Other conditions must be met as well, including the mortgage borrower's debt-to-income ratio, credit score, and down payment amount. Mortgage lenders won't allow people to spend more than 30 percent of their income on mortgage payments.

Check with your local bank as well as mortgage brokers to find a mortgage with good terms (interest rate, required PMI). Your everyday bank may extend special benefits to you for being a regular customer. If you're comfortable shopping, mortgage brokers have access to a wide variety of choices and should find a good deal for you.

Getting prequalified can take a while. Your credit score must be close to or above 640, and your income-to-debt ratio and history of on-time payments are crucial factors. Start by getting free copies of your credit report (from Experian, Equifax, and TransUnion) to correct any errors that could delay an application.

The federal interest rate, which is currently at its highest level in years, is another piece of the mortgage puzzle contributing to higher payments for buyers.

You may find a property with a low mortgage interest rate and decide to assume the seller's mortgage. Most USDA, FHA, and VA loans are assumable if you qualify for them. The catch is that you have to pay off the owner's equity, the difference between the amount left on the mortgage and the property's selling price. To do this, you're likely to need a second mortgage.

Fixed-rate mortgages are less desirable when interest rates are high (rates rise and fall incrementally over periods of years). Adjustable-rate mortgages are riskier because the interest rate can change during the loan's term. Wealthy buyers in specific areas of the country may qualify for jumbo mortgages of $760,000 to $1 million.

Mortgage options include these government programs:

• First-time home buyers can get downpayment help from the Kentucky Housing organization.
• FHA mortgages are tailored for first-time buyers with down payments of less than 5 percent.
• Rural properties may qualify for USDA loans, especially buyers with low incomes, but good credit scores.
• Military veterans and their surviving spouses may seek a Veterans Administration-underwritten VA loan. These mortgages do not require PMI and may be used multiple times by qualifying individuals.

Kentucky is no stranger to tornados, flooding, and other serious storms. If a home has a tornado shelter or full-size basement, it can save you thousands of dollars compared to installing one yourself. There are about 1,400 tornadoes annually, and Kentucky has listed $860,000,000 in tornado damage in recent years. That and floods have pushed homeowner's insurance above $3,000 per year for a $300,000 home. The national average is $2,400, but in some states, like Oklahoma, are as much as $5,000 for the same amount of coverage.

Kentucky does not require property insurance, but mortgage companies often require PMI, a type of insurance, to protect their interest in the property. PMI is required when your down payment is less than 20 percent. The cost varies according to your credit score but is generally between $400 and $1,400 per month in addition to your mortgage payment.

Look closely at your homeowner's policy to understand what is covered. In many cases, your shed, garage, or fence must be specifically listed for insurance. Appliances and personal possessions inside the home may not be covered by insurance unless they're included on an additional rider.

The Kentucky Real Estate Commission warns there are fraudulent companies trying to trick home buyers into signing up for mortgages considered predatory. These mortgages often include:

• hidden terms that may cause an owner to lose their property because payments balloon over time,
• a sales price that is not accurate
• higher than average PMI or insurance for the property or
• other complicated terms that must be met.

Buyers may not be aware of the illegal practices of fraudulent mortgage lenders until they receive a foreclosure notice. If you have purchased a property and are concerned about the terms of your mortgage, contact the Real Estate Commission or Kentucky Free Legal Aid for help.