Buying a Home
Homeownership is one of the best ways that most families can build wealth and increase their net worth. It can also be a nerve racking process that can put added pressure on a household budget and a relationship. Understanding the process to purchasing a home can help a family cope with the stress and better prepare for the obstacles that they may encounter.
The first step is to begin saving for a home purchase. The more down payment that you have available, the better your options for purchase can be. Traditional loans require 20% down. You can get around this requirement through certain loan programs, including first time buyers and FHA. If you have unsecured debt, you should take steps to pay down loans and eliminate credit card debt.
Second, you should determine how much home you can afford. The rule of thumb is that you should estimate 40-50% in addition to the mortgage payment to account for property tax, insurance repairs and general upkeep, including any Homeowners Association fees. Also consider the added cost associated with furnishing a home, especially if it includes financing a furniture purchase. A mortgage payment equal to your rent payment will still cost you much more per month in related expenses.
Now you are ready to pull your credit report. You may get a free copy through the Annual Credit Report request service established by Congress. Many mistakes on your credit record can take 30-60 days or more to clear up so it's best to start now. If you have an old unpaid item that is still on your report, you may wish to wait until your lender requires closing that item. There is generally no advantage to paying old open items until the moment your lender requires it.
Once you have an idea of what you can afford and have addressed your creditworthiness, you should begin searching for a loan. Your bank can be a good place to start if you have a good relationship with them. Also, mortgage companies often have the best rates. If your credit score is below 640, you may have to consider a subprime loan, which can cost much more in higher interest. Also, unless you can put down 20% in cash or from a second mortgage, you may have to pay private mortgage insurance (PMI) for a few years until your equity exceeds 20% of the home's value.
You may wish to determine how long you expect to remain in the home. If you plan to remain longer than five years, you should not consider loan products such as adjustable rate mortgages (ARMs) or interest only loans. These do not help you build equity and you may be exposed to substantial rate increases. These increases can in raise your monthly payment by several hundred dollars (See Spikes in ARM Defaults Expected Next Two Years).
Look into special programs in your state and local areas which may make it easier for you to qualify for and afford a home purchase. Individual Development Accounts (IDAs) can help you with match savings grant opportunities as well as low interest down payment assistance. These programs can save you thousands if you meet their qualifications.
Once you have an idea of a home purchase you can afford, begin shopping for a home. Real estate agents can be pricy, but a buyer's agent can help you avoid problems down the road. Make sure your agent is reputable and fully qualified.
Provide your agent with a list of feature that you are looking for, including number of bedrooms, baths, garage and other items. Make a list of communities and neighborhoods that you would like to live in. Schools and commutes to work can be important considerations. If you prefer to build a home rather than buy an existing home, you will want to seek available lots or contact a builder.
If you are prepared to purchase a home, you can make an offer. It should be realistic, but slightly lower than what you are willing to pay. Often a compromise is reached between sellers and buyers. A thorough inspection of the home can reveal hidden problems that might surface later. Your offer should be contingent upon a clean bill of health. If any repairs are needed, you can negotiate that repairs be made prior to purchase, or you can settle on an allowance that deducts from the selling price of the home.
Prior to the loan closing, you will be required to obtain approval for homeowners insurance. Many automobile insurance companies also insure homes. You may be eligible for a discount if your insurance company insures your home and car. Your lender will require that you have proof of approved coverage from your insurance company at the loan closing. Payment for the first year of insurance can be collected at the loan closing.
An attorney can help you close the sale. Make sure that the attorney you select has a solid reputation and is able to represent both parties. Once all papers are signed, the deal is done and you are a new homeowner!