8 Steps to Buying a Home

8 Steps to Buying a Home

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  Step 1: Decideto Buy Do you really want to pay someone else's mortgage? STEP 1 STEP 2 STEP 3 STEP 4 STEP 5 STEP 6 STEP 7 STEP 8 If you’re renting and Very few people can afford to buy their dream home when they buy their first have a stable job with home. In fact, according to the National some savings, and Association of Realtors®, 69 percent of first-time home buyers in the United a credit score in the States compromised on some features high 600 range, you of their first home. So you make some compromises, buy your first home, and can likely qualify for start building equity. This approach takes FHA or conventional you further and faster down the road to being able to own your dream home than if financing at you hadn’t purchased a home at all. historically low rates. Gary Keller and his wife Mary serve as a The key question you need to consider is, great example of how this works. They of course, why are you still renting? Think used their first home as a forced savings about it for a moment. If your reason plan for their future dream home. They is fear, then it may be time to let go of even made additional principal payments that fear and focus on the facts of home when they could to accelerate their equity ownership. Here is one example. buildup. Interestingly, this approach Fear: allowed them to pay off their first home in I can’t afford to buy my about eight years. Then, all that financial dream home. equity was available to help them build a second home—their dream home. Fact: The best way to get Continued on next page ... closer to buying your dream home is to buy your first home. 1 For more information on deciding to buy, see chapter 1 in Your First Home.
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  Step 1: Decideto Buy continued ... STEP 1 STEP 2 STEP 3 STEP 4 STEP 5 STEP 6 STEP 7 STEP 8 Purchasing your own home is a great investment that provides specific financial advantages, including equity buildup, value appreciation potential, and tax benefits. It’s also a forced savings plan that you cannot get from renting! So, again, ask yourself if you can really afford to keep renting. Here is an example scenario. BUYING VS. RENTING C A N YO U R E A L LY A F F O R D TO K E E P R E N T I N G ? Sheila’s $900 mortgage includes $700 of interest. Sheila’s friend Chris believes he “can’t afford” to buy. Her total house payments are $10,800 annually. At He pays $800 in rent each month. the end of the year, $8,400 (12 months x $700) is tax Chris’s housing costs for the year are $9,600. deductible in the United States. She is in the 28 percent So, even though he thinks he’s saving money by tax bracket, so her tax savings are $2,352 ($8,400 X .28). renting, he actually spends about $1,150 more than Her actual housing costs for the year are $8,448 Sheila–and he’s not building any equity! ($10,800 - $2,352). And Sheila has built $2,400 in equity. Above all else, when done There is never a wrong time to buy the right home. All you need to do in the short run is right, home ownership can find a good buy and make sure you have the help lay the foundation for financial ability to hold it for the long run. The most important rule for keeping your stress a life of financial security to a minimum is that you don’t have to know everything—leave that to your real estate agent. and personal choice. 2 For more information on deciding to buy, see chapter 1 in Your First Home.
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  Step 2: HireYour Agent How about putting a champ in your corner? STEP 1 STEP 2 STEP 3 STEP 4 STEP 5 STEP 6 STEP 7 STEP 8 When you’re looking for a real estate professional to help you, know that above all else good agents put their clients first. s yo u r T h e se ve n m a in ro le l p e rf o rm re a l e st a te a g e n t w il g: in cl u d e th e fo ll ow in 1. Educate you about your market. 2. Analyze your wants and needs. 3. Guide you to homes that fit your criteria. 4. Coordinate the work of other needed professionals. 5. Negotiate on your behalf. 6. Check and double-check paperwork and deadlines. 7. Solve any problems that may arise. 3 For more information on hiring your agent, see chapter 2 in Your First Home.
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  Step 3: SecureFinancing How much home can you comfortably afford? STEP 1 STEP 2 STEP 3 STEP 4 STEP 5 STEP 6 STEP 7 STEP 8 It’s normal to ask how And if you finance at less than 20 percent down, you’ll likely need to pay PMI or private much you can afford, mortgage insurance as well. It’s a lot to think and you might begin by considering your about. Ultimately, keep in mind that your monthly rent payment. You’ll also need lender will preapprove you for a certain to factor in all of your expenses and then YOU will decide what amount, but revisit your income. Lenders use fairly strict you’re comfortable paying every guidelines and formulas to dictate how much month. And you always want to leave room you can spend on your mortgage payment, for the unexpected costs and opportunities— which typically includes PITI, or principal, from furnishing to repairs to gardening. interest, taxes, and homeowner’s insurance. Your lender decides what you can borrow. But you decide what you can afford. OLIVIA AND ALEX EACH EARN $4,000 A MONTH. TRADITIONALLY,THEIR MAXIMUM HOUSING PAYMENTS WOULD BE 28 PERCENT OF THEIR INCOMES, OR $1,120. HOWEVER,THEIR FINANCIAL PROFILES ARE REALLY VERY DIFFERENT, LEADING THEM TO VERY DIFFERENT DECISIONS ABOUT HOW MUCH THEY CAN AFFORD. OLIVIA HAS $15,000 IN STUDENT LOANS, JUST ALEX’S STUDENT LOANS ARE PAID OFF, HE HAS BOUGHT A NEW CAR, AND HAS SEVERAL CREDIT LITTLE CREDIT CARD DEBT, AND HIS CAR IS AN CARDS WITH BALANCES. ECONOMY MODEL. Car payment $350 Car payment $200 Student loans $150 Credit card minimum + $50 Credit card minimum + $150 Monthly nonhousing debt $250 Monthly nonhousing debt $650 Maximum total debt payment Maximum total debt payment (36 percent of $4,000) $1,440 (36 percent of $4,000) $1,440 – $250 – $650 Safe housing payment $1,190 Safe housing payment $790 4 For more information on securing financing, see chapter 3 in Your First Home.
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  Step 3: SecureFinancing continued ... STEP 1 STEP 2 STEP 3 STEP 4 STEP 5 STEP 6 STEP 7 STEP 8 Be sure to follow these six steps to financing your home: And remember, you 1. Choose a loan officer. don’t need to save up a lot of money for the down 2. Make a loan application and get preapproved. payment. A conventional mortgage can require as 3. Determine what you want to pay and select a loan option. little as a 5 percent down payment, and there are 4. Submit to the lender an accepted purchase offer contract. even some first-time buyer programs and FHA loans that 5. Get an appraisal and title commitment. require even less. And once again, only you can decide 6. Obtain funding at closing. what you can afford. If you can afford a $1,000 monthly m payment (not includ ortgage im p a ct ing taxes and insura In te re st ra te s a low interest rate nce), se h ow m u c h h o u can allow you to af a higher-priced ho ford me.Your rate will also yo u c a n a f f o rd determine how m uch interest you pa the life of your loan y over . LOAN INTEREST MONTHLY TOTAL INTEREST AMOUNT RATE P&I PAYMENT PAID OVER 30 YEARS $136,000 8% $998 $223,251 $150,000 7% $998 $209,263 6% $995 $192,291 $166,000 For the last twenty years, the mortgage interest rate averaged approximately 8 percent in both the United States and Canada. 5 For more information on securing financing, see chapter 3 in Your First Home.
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  Step 4: FindYour Home Where, or how, do you begin your search? STEP 1 STEP 2 STEP 3 STEP 4 STEP 5 STEP 6 STEP 7 STEP 8 So you are preapproved and ready to begin your search. But how or Yo u r h o m e where do you begin? wants and The best thing to do is consult with your agent to more accurately pinpoint the home n e e d s c r it e r ia : you are looking for. This is likely the biggest investment you’ll ever make, and you’ll need to create a criteria for a home that meets Location all of your important needs, and as many of your additional wants as possible. Some Size questions you might ask yourself include: Condition Appreciation or a new home? Neighborhood appreciation? Freestanding or condo/town home, resale or new contstruction Features and amenities Which do I really need? You’ll learn as you look at homes, it’s wise Potential for expansion to refine your priorities along the way. And or improvment your agent is experienced and can help expedite the process. 6 For more information on finding your home, see chapter 4 in Your First Home.
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  Step 5: Makean Offer So what's a fair price for the home you love? STEP 1 STEP 2 STEP 3 STEP 4 STEP 5 STEP 6 STEP 7 STEP 8 Congratulations! So you’ve fulfill the contract. Okay, it can get admittedly found a home you love. Now you confusing here. So look to your agent to guide need to make a compelling offer. The three the right price you. Keep in mind, basic components of your purchase offer to offer should reflect the fair are price, terms, and contingencies. Price is market value of the home you obviously the dollar amount you are approved want to buy. Your agent’s market for, willing, and able to pay. Terms cover the research will help guide this decision. other financial and timing factors that will be included in your offer. Contingencies are clauses that let you out of the deal if the house has a problem that didn’t exist or that you weren’t aware of when you went under contract. Contingencies specify any event W ha t’s a fa ir pr ic e fo r that will need to take place in order for you to 34 5 Ca rd in al la ne ? Welcome to The Grasslands, a quiet neighborhood built in the 1960s. Most homes here have three bedrooms, range from about 1,500 to 1,750 square feet, and have been selling between $140,000 and $180,000. You want to make an offer on 345 Cardinal Lane, listed at $165,000. What price will you offer? 123 Eagle Pass 223 Robin Lane 345 Cardinal Lane updated in the past five years extensive landscaping Sold last week for $90/square You decide to offer foot, or $139,500 $95/square foot, Sold two weeks ago for or $157,000 $102/square foot, or $175,950 7 For more information on making an offer, see chapter 5 in Your First Home.
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  Step 6: PerformDue Diligence Know what to expect when you're inspecting? STEP 1 STEP 2 STEP 3 STEP 4 STEP 5 STEP 6 STEP 7 STEP 8 Just because you love decision for you. And remember, if your home passes inspection with flying colors, you’ll a particular property still need to buy a homeowner’s insurance doesn’t mean that it’s policy to protect against loss or damage to perfect. In fact, this is where reason the property itself and against liability in case someone sustains an injury while on your has to trump emotion. And you’ll have help property. here, too. You’ll need to have a property inspection (which we highly recommend you attend) that will hopefully expose all the issues a home might hide. This way you’ll know exactly what you are getting into before you sign closing papers. Your main concern is the possibility of structural damage. This can come from water damage, shifting ground, or poor construction when the house was built. And remember, don’t sweat the small It’s the inspector’s job to stuff. mark everything discovered, no matter how large or small. Things that are easily fixed can be overlooked. In case you have a big problem show up in your inspection report, you should bring in a specialist. And if the worst-case scenario turns out to be true, you might want to walk away from the purchase. Again, this is your home, so work with your agent and make the best 8 For more information on performing due diligence, see chapter 6 in Your First Home.
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  Step 7: Close Know how to keep yourself mortgage worthy? STEP 1 STEP 2 STEP 3 STEP 4 STEP 5 STEP 6 STEP 7 STEP 8 You’ve made an offer and performed due diligence, which means you’re now in the “home” stretch, pun But you have a few intended. preclosing responsibilities, and these include staying in control of your credit and finances, first and foremost. You will also need to keep in touch with your agent and lender and return all phone calls and paperwork promptly. You might need to communicate with your agent at least once or twice a week, and verify with your lender that all mortgage funding steps are completed. If possible, conduct a final walk-through of the home with your agent as well. confirm with And finally, be sure to your agent, home insurance professional, and lender that you have the settlement statement, certified funds, and evidence of insurance lined up prior to closing. 9 For more information on closing, see chapter 7 in Your First Home.
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  Step 8: ProtectYour Investment Are you giving your home the love it needs? STEP 1 STEP 2 STEP 3 STEP 4 STEP 5 STEP 6 STEP 7 STEP 8 Whew. That was exhausting. But you’re done! Well, sort of. You’ve closed and moved in, but now you’ll need to protect your investment for years to come. And you can do so by performing routine maintenance on your home’s systems, depending on their age and condition. A good rule of thumb is to watch for signs of leaks, damage, and wear. If you fix small problems early, you will save yourself from having to spend big money later. And remember that kind real estate professional who assisted you throughout the process? Well, after closing your agent can still help you with such things as providing information for your tax returns, finding contractors and repair services, and even tracking your home’s current market value. 10 For more information on protecting your investments, see chapter 8 in Your First Home.