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!
© 2004-2010 Vision Credit Education, Inc. All rights reserved.
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