Buying a home is one of the biggest decisions – both financially and emotionally – you will make in your lifetime. If you’re a first-time buyer, you’re probably thrilled about making the jump from apartment renting to owning your own house. While you’re excited, however, you also may be a bit overwhelmed by the procedures involved. Relocating or move-up buyers have the advantage of past experience, but still might need a refresher course on the intricacies of the process.
The buying process involves several steps, from finding a REALTOR® to making an offer to closing the deal. Whether you’re a first-time or experienced buyer, you’ll find an array of information in this section that will assist you on your way to realizing your goal of homeownership.
- The American Dream
- Are you Ready To Buy?
- Tips for First-Time Homebuyers
- 10 Things to Take the Trauma Out of Homebuying
- 10 Questions to Ask Your Lender
- 10 Things a Lender needs from You
- Common Closing Costs for Buyers
- Tips for Packing Like a Pro
The American Dream
For the vast majority of us, owning a home is part of the American Dream. According to a study conducted by the NATIONAL ASSOCIATION OF REALTORS®, 87 percent of those polled cited owning a home as the number one criterion for defining “the good life.” Owners and renters alike considered homeownership desirable for the following reasons: the pride of ownership, their dislike of paying rent, and the ability to change features of their homes to match their individual tastes and needs.
In addition, owning your own home provides a sense of security and well-being that’s hard to beat. Home is where we raise our families, have friends over for summer barbeques, paint the baby’s room pink or blue, and find refuge from the outside world.
Owning a home offers other advantages as well. For instance, as a homeowner, you have control over your environment. Not only can you change your home to meet your needs, but you also aren’t subject to the terms of a lease or a landlord. As a homeowner, you can experience the emotional and financial security that comes from knowing what your housing expenses will be from year to year. Unlike rents, which can increase annually, most mortgages have fixed or capped monthly payments. So, as a homeowner, you can have a much better idea of what proportion of your paycheck goes toward your home. Think of it as the ultimate savings plan.
And it only gets better. Homeownership is the primary component in the creation of wealth for many Americans. Data from Harvard University’s Joint Center of Housing Studies illustrate not only that the median net wealth of homeowners is 34 times greater than that of renters, but also that over half of that wealth is generated from home equity. As you pay down your loan amount each month, you accumulate equity, a growing ownership interest in your property. If you need funds, you can borrow against this equity in the form of a home equity loan. Further, interest on a portion of home equity is tax-deductible.
Most homes appreciate in value over time and can be a source of income for you, especially if you’ve lived in your house for many years. When you retire, you can sell your home if you need the funds or make use of a home equity conversion mortgage.
Finally, don’t forget about the significant tax advantages of owning your home. Interest on a home mortgage and property taxes are deductible. For most of us, mortgage interest provides the largest tax deduction. Also, a home is the single most important factor that determines whether you will be able to file a return which takes advantage of the wide range of allowable itemized deductions.
Homebuying Means Getting Back To The Basics
Recently, the CALIFORNIA ASSOCIATION OF REALTORS® surveyed homebuyers to find out what they considered to be important in the purchase of their homes. The largest percentage, 27 percent, considered the mere ownership of a home as the most important reason to buy. Moving to a better neighborhood (17 percent), wanting a larger home (10 percent), and realizing the tax advantages of homeownership (8 percent) were other reasons cited for buying homes. Seven percent focused on investment value as their primary motivation for homeownership.
Over the years, your home likely will be the best investment you’ll ever make. But more importantly, it will be the place that offers you and your family shelter, security and stability. That’s some return on investment.
Are You Ready To Buy?
As with any major purchase, it pays to be informed prior to making any decisions. As experienced buyers already know, buying a home is a complicated process, so it‘s important to start at the beginning and thoroughly understand each step. Whether you‘re buying your first home or your third, make sure you have the necessary financial resources and have explored all your options before you purchase a new home.
If you‘re a first-time buyer, you should weigh the pros and cons of homeownership versus renting. There are many advantages and disadvantages to consider. For example, renters have the freedom of mobility if they choose to move, but their monthly rent checks do not establish long-term equity or produce any other benefits. And while homeowners‘ mortgage payments accumulate equity, these payments are generally higher than rent payments and come with the responsibility to manage the care and upkeep of the property.
Both new and experienced buyers have their own sets of financial considerations when it comes to buying a home. Move-up buyers should evaluate their financial situation to ensure they‘re prepared to meet the higher mortgage payments involved with relocating. Likewise, first-time buyers should determine if monthly mortgage payments fit in their budgets. In addition, you‘ll need to be prepared to cover the downpayment and closing costs. And, you should consider whether you meet the basic criteria to qualify for a mortgage; lenders prefer that applicants offer a stable job history and a good credit record.
10 Tips for First-Time Homebuyers:
- Be picky, but don’t be unrealistic. There is no perfect home.
- Do your homework before you start looking. Decide specifically what features you want in a home and which are most important to you.
- Get your finances in order. Review your credit report and be sure you have enough money to cover your downpayment and your closing costs
- Don’t wait to get a loan. Talk to a lender and get prequalified for a mortgage before you start looking.
- Don’t ask too many people for opinions. It will drive you crazy. Select one or two people to turn to if you feel you need a second opinion.
- Decide when you could move. When is your lease up? Are you allowed to sublet? How tight is the rental market in your area?
- Think long-term. Are you looking for a starter house with the idea of moving up in a few years or do you hope to stay in this home longer? This decision may dictate what type of home you’ll buy as well as type of mortgage terms that suit you best.
- Don’t let yourself be house poor. If you max yourself out to buy the biggest home you can afford, you’ll have no money left for maintenance or decoration or to save money for other financial goals.
- Get help. Consider hiring us as a buyer’s representative. Unlike a listing agent, whose first duty is to the seller, a buyer’s representative is working only for you. And often, buyer’s reps are paid out of the seller’s commission payment.
10 Things to Take the Trauma Out of Homebuying
- Find a real estate agent that’s simpatico. Homebuying is not only a big financial commitment, but also an emotional one. It’s critical that the agent you chose is both skilled and a good fit with your personality.
- Remember, there’s no “right” time to buy, any more than there’s a right time to sell. If you find a home now, don’t try to second-guess the interest rates or the housing market by waiting. Changes don’t usually occur fast enough to make that much difference in price, and a good home won’t stay on the market long.
- Don’t ask for too many opinions. It’s natural to want reassurance for such a big decision, but too many ideas will make it much harder to make a decision.
- Accept that no house is ever perfect. Focus in on the things that are most important to you and let the minor ones go.
- Don’t try to be a killer negotiator. Negotiation is definitely a part of the real estate process, but trying to “win” by getting an extra-low price may lose you the home you love.
- Remember your home doesn’t exist in a vacuum. Don’t get so caught up in the physical aspects of the house itself—room size, kitchen—that you forget such issues as amenities, noise level, etc., that have a big impact on what it’s like to live in your new home.
- Don’t wait until you’ve found a home and made an offer to get approved for a mortgage, investigate insurance availability, and consider a schedule for moving. Presenting an offer contingent on a lot of unresolved issues will make your bid much less attractive to sellers.
- Factor in maintenance and repair costs in your post-home buying budget. Even if you buy a new home, there will be some costs. Don’t leave yourself short and let your home deteriorate.
- Accept that a little buyer’s remorse is inevitable and will probably pass. Buying a home, especially for the first time, is a big commitment, but it also yields big benefits.
- Choose a home first because you love it; then think about appreciation. While U.S. homes have appreciated an average of 5.4 percent annually over from 1998 to 2002, a home’s most important role is as a comfortable, safe place to live.
10 Questions to Ask Your Lender
Be sure you find a loan that fits your needs with these comprehensive questions.
- What are the most popular mortgage loans you make? Why?
- Which type of mortgage plan do you think would best for us? Why?
- Are your rates, terms, fees, and closing costs negotiable?
- Will I have to buy private mortgage insurance? If so how much will it cost and how long will it be required? NOTE: Private mortgage insurance is usually required if you make less than a 20-percent downpayment, but most lenders will let you discontinue the policy when you’ve acquired a certain amount of equity by paying down the loan.
- Who will service the loan? Your bank or another company?
- What escrow requirements do you have?
- How long is your loan lock-in period (the time that the quoted interest rate will be honored)? Will I be able to obtain a lower rate if they drop during this period?
- How long will the loan approval process take?
- How long will it take to close the loan?
- Are there any charges or penalties for prepaying the loan?
10 Things a Lender Needs From You
- W-2 forms or business tax return forms if you’re self-employed for the last two or three years for every person signing the loan.
- Copies of at least one pay stub for every person signing the loan.
- Copies of two to four months of bank or credit union statements for both checking and savings accounts.
- Copies of personal tax forms for the last two to three years.
- Copies of brokerage account statements for two to four months, as well as a list of any other major assets of value, e.g., a boat, RV, or stocks or bonds not held in a brokerage account.
- Copies of your most recent 401(k) or other retirement account statement.
- Documentation to verify additional income, such as child support or a pension.
- Account numbers of all your credit cards and the amounts of any outstanding balances.
- Lender, loan number, and amount owed on other installment loans, such as student loans and car loans.
- Addresses where you have lived for the last five to seven years, with names of landlords if appropriate.
Common Closing Costs for Buyers
The lender must disclose a good faith estimate of all settlement costs. A check to cover your closing costs will probably have to be a cashier’s check or wire. The title company or other entity conducting the closing will tell you the required amount for:
- Loan origination fees.
- Points, or loan discount fees you pay to receive a lower interest rate.
- Appraisal fee.
- Credit report.
- Private mortgage insurance premium.
- Insurance escrow for homeowners insurance, if being paid as part of the mortgage.
- Property tax escrow, if being paid as part of the mortgage. Lenders keep funds for taxes and insurance in escrow accounts as they are paid with the mortgage, then pay the insurance or taxes for you.
- Deed recording fees.
- Title insurance policy premiums.
- Inspection fees—building inspection, termites, etc.
- Notary fees.
- Prorations for your share of costs such as utility bills and property taxes.
A Note About Prorations
Because such costs are usually paid on either a monthly or yearly basis, you might have to pay a bill for services used by the sellers before they moved. Proration is a way for the sellers to pay you back or for you to pay them for bills they may have paid in advance. For example, the gas company usually sends a bill each month for the gas used during the previous month. But assume you buy the home on the 6th of the month. You would owe the gas company for only the days from the 6th to the end for the month. The seller would owe for the first 5 days. The bill would be prorated for the number of days in the month, and then each person would be responsible for the days of his or her ownership.
Tips for Packing Like a Pro
- Develop a master “to do” list so you won’t forget something critical.
- Sort and get rid of things you no longer want or need. Have a garage sale, donate to a charity, or recycle.
- Don’t throw out everything. If your inclination is to just toss it, ask yourself how frequently you use an item and how you’d feel if you no longer had it.
- Pack like items together. Put toys with toys, kitchen utensils with kitchen utensils.
- Decide what if anything you plan to move yourself. Precious items such as family photos, valuable breakables, or must-haves during the move should probably stay with you.
- Use the right box for the item. Loose items encourage breakage.
- Put heavy items in small boxes so they’re easier to lift. Keep weight under 50 lbs. if possible.
- Don’t over-pack boxes and increase the chances they will break.
- Wrap every fragile item separately and pad bottom and sides of boxes.
- Label every box on all sides. You never know how they’ll be stacked and you don’t want to have to move other boxes aside to find out what’s there.
- Use color-coded labels to indicate which room each item should go in. Color-code a floor plan for your new house to help movers.
- Keep your moving documents together, including phone numbers, driver’s name and van number. Also keep your address book handy.
- Back up your computer files before moving your computer.
- Inspect each box and all furniture for damage as soon as it arrives.
- Remember, most movers won’t take plants.