Buying a Home
Doís and doníts for homebuyers
While youíre searching for that perfect home, there are a
few things you need to do and some traps to steer clear of in the meantime.
Make a wish list
To help you pinpoint the kind of home youíre looking for, make a wish list
of what it should include. You may not get all the items on your list and
find your dream home, but it will help you identify the specifics you
require. If closet space, a garage, a large kitchen, or a large backyard,
defining what you want will help you narrow down the options when you do
start your search.
Do get your credit in good order. If youíve never checked your credit report
before, now is the time to do so to avoid any nasty surprises when it comes
time to secure a mortgage.
Research, research, research
Do a thorough research on the area in which you plan to buy a home. If you
have kids, check out the schools nearby. Find out about property taxes and
zoning laws in case you want to make improvements to your property later on.
Make sure all the essentials you need to be comfortable are nearby.
No major purchase
Donít commit your funds to any major purchase that would create debt of any
kind. This includes furniture, appliances, electronic equipment, jewelry,
vacations, expensive weddings and automobiles.
Donít move money around
When a lender reviews your loan package for approval, one of the things they
are concerned about is the source of funds for your down payment and closing
costs. Most likely, you will be asked to provide statements for the last two
or three months on any of your liquid assets. This includes checking
accounts, savings accounts, money market funds, certificates of deposit,
stock statements, mutual funds, and even your company 401(k) and retirement
If you have been moving money between accounts during that time, there may
be large deposits and withdrawals in some of them.
The mortgage underwriter (the person who actually approves your loan) will
probably require a complete paper trail of all the withdrawals and deposits.
You may be required to produce cancelled checks, deposit receipts, and other
seemingly inconsequential data, which could get quite tedious.
To ensure quality control and eliminate potential fraud, it is a requirement
on most loans to completely document the source of all funds. Moving your
money around, even if you are consolidating your funds to make it "easier,"
could make it more difficult for the lender to properly document.
So leave your money where it is until you talk to a loan officer.
OhÖdonít change banks, either.
Should you change jobs?
For most people, changing employers will not really affect your ability to
qualify for a mortgage loan, especially if you are going to be earning more
money. For some homebuyers, however, the effects of changing jobs can be
disastrous to your loan application.
Reasons to Delay Buying a Home
Assuming you have the financial resources and the desire to eventually
own your own home, there are very few good reasons to put off the purchase.
You can miss out on years of appreciation if you do.
The main thing you want to avoid when buying a home is being put in a
position where you will have to sell it too soon. If you have to sell a home
before it has appreciated enough to cover the costs and commissions of
selling, you could find yourself in a financial bind. This is especially
true for those who buy a home with a down payment of ten percent or less.
Real Estate commissions traditionally run around six percent of a homeís
sales price. The sellerís closing costs generally come to about one and a
half percent. You can see how this can easily exceed the first yearís
appreciation. If you made a minimal down payment, you could actually have to
come up with cash out of pocket to sell your home.
New to the Area
A very good to reason to delay buying a home is if you have just moved to an
unfamiliar area or region of the country. It makes sense to rent for a
number of months before deciding on exactly where you want to live. Often
when people buy a home immediately they find that they might have made a
better decision if they had waited awhile.
Uncertain Job Future
You could be right out of college or expecting a promotion and a transfer.
Or your company has announced an impending "restructuring." If any of these
apply, it might be best to wait to buy a home. When you have a more accurate
picture of what your next few years will be like, that will be the time to
Real estate agents see a lot of life unfold before their eyes. One of the
saddest occurs when former clients divorce and are forced to sell a recently
purchased house. It happens all too often when a family in turmoil decides
that buying a new home may help resolve their problems. Perhaps it is
inevitable that such problems occur, but selling a home before it
appreciates can create an additional financial burden in an already
THE FIRST-TIME HOMEBUYER
Many people dream of becoming homeowners, but they are often afraid that it
is too big a step for them to take or that they donít have the credit or
capital to finance their dream. Getting the right information is the first
step to making that dream of owning a home a reality.
Question: What is the first step to buying a home?
Answer: Make sure you are ready - psychologically and financially. Ask
yourself the following questions: Do I have a steady income? Is my debt
lower than my total income? Do I have enough money to pay for the down
payment and closing costs? Am I working hard enough to improve bad credit?
A house needs constant care and attention so you should also ask yourself if
your budget will allow for unexpected repairs and upkeep. Once you can
honestly answer "yes" to these questions, you are several steps ahead of the
game and that much closer to becoming a homeowner. Below are some more
questions and answers for first-timers.
Common Questions from First-time Homebuyers
Q. Why should I buy, instead of rent?
A A home is an investment. When you rent, you write your monthly check and
that money is gone forever. But when you own your home, you can deduct the
cost of your mortgage loan interest from your federal income taxes, and
usually from your state taxes. This will save you a lot each year, because
the interest you pay will make up most of your monthly payment for most of
the years of your mortgage. You can also deduct the property taxes you pay
as a homeowner. In addition, the value of your home may go up over the
years. Finally, you'll enjoy having something that's all yours.
Q. What are "HUD homes," and are they a good deal?
A. HUD homes can be a very good deal. When someone with a HUD insured
mortgage can't meet the payments, the lender forecloses on the home; HUD
pays the lender what is owed; and HUD takes ownership of the home. Then we
sell it at market value as quickly as possible.
Q. Can I become a homebuyer even if I have I've had bad credit, and don't
have much for a down-payment?
A. You may be a good candidate for one of the federal mortgage programs.
Start by contacting one of the HUD-funded housing counseling agencies that
can help you sort through your options. Also, contact your local government
to see if there are any local homebuying programs that might work for you.
Q. Are there special homeownership grants or programs for single parents?
A. There is help available. Although as a single parent you won't have the
benefit of two incomes on which to qualify for a loan, consider getting
pre-qualified, so that when you find a house you like in your price range
you won't have the delay of trying to get qualified. Contact one of the
HUD-funded housing counseling agencies in your area to talk through other
options for help that might be available to you. Research buying a HUD home,
as they can be very good deals. Also, contact your local government to see
if there are any local homebuying programs that could help you.
Q. How much money will I have to come up with to buy a home?
A. That depends on several factors, including the cost of the house and the
type of mortgage you get. In general, you need to come up with enough money
to cover three costs: earnest money - the deposit you make on the home when
you submit your offer, to prove to the seller that you are serious about
wanting to buy the house; the down payment, a percentage of the cost of the
home that you must pay when you go to settlement; and closing costs, the
costs associated with processing the paper work to buy a house.
When you make an offer on a home, your real estate broker will put your
earnest money into an escrow account. If the offer is accepted, your earnest
money will be applied to the down payment or closing costs. If your offer is
not accepted, your money will be returned to you. The amount of your earnest
money varies. If you buy a HUD home, for example, your deposit generally
will range from $500 - $2,000.
The more money you can put into your down payment, the lower your mortgage
payments will be. Some types of loans require 10-20% of the purchase price.
That's why many first-time homebuyers turn to HUD's FHA for help. FHA loans
require only 3% down - and sometimes less.
Closing costs - which you will pay at settlement - average 3-4% of the price
of your home. These costs cover various fees your lender charges and other
processing expenses. When you apply for your loan, your lender will give you
an estimate of the closing costs, so you won't be caught by surprise. If you
buy a HUD home, HUD may pay many of your closing costs.
Q. How do I know if I can get a loan?
A. If the amount you can afford is significantly less than the cost of homes
that interest you, then you might want to wait awhile longer. But before you
give up, why don't you contact a real estate broker or a HUD-funded housing
counseling agency? They will help you evaluate your loan potential. A broker
will know what kinds of mortgages the lenders are offering and can help you
choose a lender with a program that might be right for you. Another good
idea is to get pre-qualified for a loan. That means you go to a lender and
apply for a mortgage before you actually start looking for a home. Then
you'll know exactly how much you can afford to spend, and it will speed the
process once you do find the home of your dreams.
Q. How do I find a lender?
A. You can finance a home with a loan from a bank, a savings and loan, a
credit union, a private mortgage company, or various state government
lenders. Shopping for a loan is like shopping for any other large purchase:
you can save money if you take some time to look around for the best prices.
Different lenders can offer quite different interest rates and loan fees;
and as you know, a lower interest rate can make a big difference in how much
home you can afford. Talk with several lenders before you decide. Most
lenders need 3-6 weeks for the whole loan approval process.
Source: U.S. Department of Housing and Urban Development
Stepping into your own home
ďIím homeĒ is a phrase many of us would like to say, yet some of us are
still waiting to make that first move toward owning our own home. Hereís a
step-by-step guide to help you make that house your home
Step 1: Defining What You Want
Start by creating a prioritized list of features you want in your next home
and the reasons why. Use it as your search guide, but remember that
depending on your funding, you will probably need to make some compromises.
In addition, talk to your real estate professional about where you want to
live. Location is a huge part of any move. Real estate professionals are
usually trained to help their clients narrow down their choices by sharing
market trends and local information like neighborhood statistics and
Step 2: Figuring Out What You Can Afford
Now that you know what you want, it's time to see what you can afford. You
can start by crunching the numbers yourself.
When you're ready to move to the next step, you can get pre-approved for a
mortgage. This process can often be performed in under an hour and it
accomplishes two important goals. First, it will tell you how much house you
can afford and what your monthly payments would be. Second, it tells the
seller that you can afford to buy their home.
By definition, a pre-approved buyer has an approved mortgage subject to an
appraisal of the property. Many times a buyer can use this pre-approved
status as leverage during the negotiation process.
Step 3: Shopping For Homes
Once you know what community you'd like to live in and have an idea of how
much house you can afford, its time to start checking out actual properties.
Beginning this search online can help save you time since it can help you
target homes that meet your search criteria.
Next, begin visiting homes in person. Ask your local real estate
professional to arrange visits and attend open houses that are in your
target area and price range. When comparing homes, make sure to look at all
aspects of the property. Is the property tax approximately the same? Are
both the houses renovated? Do they both have the same amount of bedrooms and
bathrooms? Are both houses located on the same or similar streets? Does
either house have any encumbrances?
Remember to keep an open mind when you are looking at homes.
Step 4: Making An Offer
Once you find the home you want, you need to make an offer for the house.
Typically this is a very difficult and trying time since both parties have
totally different goals. In most cases it is better to have a third party,
such as a real estate professional, negotiate the offer. If you have any
personal interaction with the homeowner, don't give out any information
about your move, your current housing status, financial status or your
feelings about their property - positive or negative. This could hurt you in
This might also be a good time to consider purchasing a home protection
plan. These insurance policies can be purchased by the buyer or seller and
help protect against unexpected costs or home repairs during the listing
period or in the initial years after a home has been purchased.
Step 5: Inspections and Insurance
After your offer is accepted you will need to set up, coordinate and
interpret various inspections, including insect, radon, building quality,
oil tank, title, etc. You will also need to arrange for homeowners insurance
and finalize the mortgage. This is a major step in the buying process and
there are many potential problems that can be discovered during this period.
These include a leaky roof, radon gas, termite damage, a foundation problem,
and wall cracks, to name a few. These problems happen all the time. The
difference between closing on your dream home and starting the process all
over again is what occurs during the negotiations between you and the
In most states you will also have the option of a "walk through" before the
closing. This is your last chance to make sure that all of the items that
you have agreed upon were completed to your satisfaction.
Step 6: The Final Closing
Before you arrive at the closing, make sure all the necessary paper work and
deposits have been completed. If the mortgage, title work, homeowners
insurance and other items necessary under local and state laws are not
completed and brought to the closing table, the closing may not happen on
time. And, depending on what the contract says, this could result in further
action including financial penalties and even the loss of your rights to the
Once you close, it's official - you own the house! But there might be a few
things you want to do before you lay out the welcome mat. These include
arranging for an alarm system, turning on the electricity, subscribing to
the local paper, cleaning or replacing the carpet, arranging for lawn
services, etc. This could also be a good time to make some needed