Home Buyer's Manual

TOP CONTRIBUTORS

Kathryn Lipiecki

This is an introduction to how to buy a home. It is intended to inform buyers about the financial impact of buying a home. Every home sale is different, and each buyer will encounter a separate set of issues - but these eight steps are common to any home purchasing process, and all buyers should be prepared for the decisions that must be made along the way to owning a home.

Evaluation

Homeownership can be a great financial asset—but only if one can afford it. The results of poor lending and borrowing practices can be seen on the front pages of newspapers worldwide, and foreclosures are on the rise and have reached their highest levels, according to the Mortgage Bankers Association, since they began keeping records in the 1970s,^[1] so before making the decision to buy it is important to determine if this is really an affordable investment. This can be done through the evaluation of assets, income, credit worthiness, and potential financial benefits.

Renting vs. Owning

Though some view renting as throwing one’s money away, renting does have its benefits. Renting serves a key benefit: it provides a place to live, which is a necessity. For those who move more frequently renting also allow the resident to move with relatively short notice without worrying about potentially covering double housing costs (paying the mortgage on a house that did not sell and covering new housing costs in a new location). Renting does not tie the resident to a single location, and many benefit from this increased mobility. Renters also are not responsible for covering basic maintenance and home improvement expenses, which can range from minor plumbing clogs to the more substantial costs of appliance or mechanical system replacement.

Benefits of Ownership

Homeownership is more expensive than renting, but such an investment is associated with many more financial benefits, such as tax benefits, an increase in one’s net worth, and can act as a way to save money.cash loans

• Tax benefits

Tax benefits are offered by the government as an incentive to homeownership through programs such as the First-Time Home Owners tax credit,^[2] and by allowing the deduction of paid mortgage interest from income taxes. Many other types of tax programs offer deductions based on the type of buyer(new verses repeat buyer) and the type of home (some historic homes quality for state income tax deductions). Real estate taxes are also deductible.

• Building equity

Home equity refers to the difference between the value of the home and the amount owed on the mortgage. Essentially equity is the value of an owner’s interest in his/her property. One builds equity through homeownership by paying down the principal mortgage amount.

• Potential home appreciation

Home appreciation refers to the increase in value of an asset, and it occurs over time as the property value of the home rises. The appreciation of a home is not a given, especially in the current economy as foreclosure rates have increased. Between August 2007 and August 2007 the median value of homes in the United States decreased by 9.5 percent. ^[3] However, if one is planning on staying in the property for a number of years often appreciation will be a likely outcome depending on location, the state of the economy, and the state of repair of the property.

Foreclosures

Owning a home is a way to make one’s monthly housing payment more financially beneficial in the long run, but only if it is something that one can afford to do. Foreclosure filings have risen twelve percent between August 2007 and August 2008.^[4] This is partly due to predatory lending practices that were targeted at the subprime lending market where some people were led to believe that they could afford a larger mortgage than they could, or took out mortgages with unfavorable conditions.

A foreclosure occurs when a homeowner defaults on a loan, taxes, or even utility bills, and the properties are then reclaimed by the lien holder. These properties are often resold at auction at a reduced rate. Foreclosures are a financial and an emotional distress to the owner and can destroy one’s credit score. Prior to entering into homeownership one should determine if it is affordable in order to avoid such a situation. On the other hand, purchasing a foreclosed property can be a good investment as they are often reduced in value and are therefore more affordable.

Preparation

The first step when considering purchasing a home is to evaluate if this is an investment that can be made immediately or if it is something that requires postponement so that the potential homeowner can work toward the purchase of the home of his/her dreams. This is the largest investment that most people will ever make, and the investor should evaluate the potential return on investment just as prudently as one would investigate a company prior to purchasing stock. A home can be a highly emotional purchase, but the decision should be made with full understanding of repayment ability. Review monthly and annual expenses, savings, and possible mortgage payment amounts.

Expenses

Review your monthly expenses and determine the amount per month that you can afford to put toward living costs. Keep in mind that rent payment amount will not likely translate directly into mortgage payment amount. Monthly expenses will change with home purchase. Commuting time may increase or decrease, utility bill responsibility may increase, there may be association dues to pay, and maintenance costs will be your responsibility. Many websites feature mortgage calculators to determine mortgage amounts. Be sure to have the following information on hand:

• Monthly payment amount (amount you can afford to put toward a mortgage)

• Down payment amount

• Interest rate (the actual rate is dependent on credit score)

• Length of mortgage (typically 30 years)

If the amount of mortgage that you can afford is not enough to purchase a home in your desired location consider holding off an a purchase or increasing the amount of down payment, which may lower the monthly payments or increase the mortgage amount that you can afford.

Down Payment

The size of down payment is one factor in the ability of a buyer to purchase a home. A larger down payment is typically associated with smaller monthly payments/a larger mortgage. Most down payments are required to be at least ten percent of the mortgage amount. Though depending on the mortgage type this may be lower or higher. The down payment for a loan through the Federal Housing Authority (FHA) may be as low as three percent,^[5] while those with poor credit may only qualify for a mortgage if they agree to a higher down payment, which reduces the risk of the lender. Many federal and state programs offer programs that may lower the initial down payment. Some programs are geared specifically toward first-time home buyers. Research which programs you could qualify for.

Prior to liquidating assets to obtain more money for a down payment, first consider the allowable sources for down payments. Each mortgage program has different requirements.

Credit check

Another important factor to consider when purchasing a home (if you are planning on obtaining financing through a mortgage lender) is one’s credit score, or FICO score. The credit score informs lenders of the type of risk they would be incurring by lending an individual or group of individuals the money. The lower the score the greater the riskiness of the borrower. Higher interest rates are given to borrowers with lower scores to lessen the risk of the lender. For that reason it is important to check your credit score and attempt to raise your score prior to applying for a mortgage. Anything above 750 is considered excellent, while anything below 650 will make it difficult to obtain the lowest interest rate and can even jeopardize one’s ability to qualify for a mortgage. In the current economic situation with less credit available, lenders are increasing minimum credit scores, increasing the importance of high scores. ^[6] With a larger down payment and a score of at least 740 one should be able to secure a favorable interest rate in the current economy.^[7]

Credit Report

Before even applying for a mortgage obtain a copy of your credit report. Everyone is entitled to a free credit report on an annual basis from each of the three major credit reporting agencies. Those agencies are:

• Experian

• Equifax

• TransUnion

These reports can be obtained through a single website: www.annualcreditreport.com. Go through the report line-by-line and verify that it is accurate. Dispute anything that you do not believe is correct and report identify theft if it is suspected. Take steps to improve your credit score if necessary, which will help to decrease the interest rate that will be applied to your loan.

Financing

Guide to Mortgages

Understanding a mortgage

Types of mortgages

Costs associated with mortgages

Lenders

Shopping for a lender

Interest Rates

Pre-approval vs. pre-qualification

Finding a home

Real Estate Agents and Brokers

Costs Associated with Homes

• New home
• Pre-owned home
• Historic home

Things to Consider

• Age of appliances/mechanical equipment
• Warranties
• Utility bills
• Association dues
• Property taxes
• Repairs
• Transportation costs
• Home maintenance
  • Routine
  • Emergency
• Homeowner's insurance

Making an offer

Legal Counsel

Home Contracts

Earnest money

Deposit

Inspections

Home Inspection

Closing Inspection

Closing

Finalizing a mortgage

Settlement procedures

Fees due at closing

• Lender fees
• Third party fees
• Government fees
• Escrow/Interest fees
• Miscellaneous fees

Moving Costs

Moving companies

Storage facilities

Other Details to Consider

Scams to Watch for

• Low/No money down
• Predatory lending practices
• Subprime market
• Unnecessary costs to avoid

1. ↑ Maura Reynolds. Los Angeles Times, “Foreclosure rate hits record high”.
2. ↑ National Association of Home Builders. First-Time Home Buyer Tax Credit.
3. ↑ Real Estate ABC. Real Estate Home Appreciation - Last 12 Months.
4. ↑ Realty Trac. Foreclosure Rate Increases 12 Percent in August.
5. ↑ U.S. Department of Housing and Urban Development. Let FHA Loans Help You.
6. ↑ Ron Lieber. The New York Times, ”One Thing You Can Control: Your Credit Score”.
7. ↑ Ron Lieber. The New York Times, ”One Thing You Can Control: Your Credit Score”.