Buying a home: The basics – Realistic points to consider before buying a home
-How do you know if you’re ready?-
The road to home ownership is long and paved with many obstacles. Just as important as finding the right home within your price range, knowing your qualifying status is the difference between a loan approval or a disappointing turndown.
Your first step should be considering all the things your potential creditors will. Take a look at your credit, review your job history and make sure you have a complete and clear understanding of what it takes to maintain a home. Your credit score is the first thing a lender will evaluate. Because credit reports regularly have errors, it’s important you know exactly what’s on yours. There are three major credit bureaus, Transunion, Experian and Equifax. Contact information for each is listed in the yellow pages and each will provide you with either a free report or one for a minimal fee. If you have no idea what might be on yours it’s a good idea to educate yourself to your personal situation.
During process of underwriting, your employment history will be scrutinized as well. If you’ve recently changed jobs, it may pose a problem or it may not. The factors leading to job changes can be viewed as a favorable maneuver. If you have a good two-year employment history with your current employer, there isn’t really anything to worry about, but be ready to explain frequent job changes and substantiate them with either pay increases, layoffs, or other legitimate factors for changing jobs.
While there are many aspects and advantages to owning a home, some people just aren’t ready. First of all you’ll need a down payment. While there are assistance programs, a savings account with at least $5000 will help you qualify for your loan. Not only does it show you’ve committed yourself to buying a home, it shows responsibility towards finances. Once you’ve become a homeowner, a savings program that you contribute to regularly for emergencies is a crucial asset to have. Let’s face it, things happen, and no matter how great a new house is, things do break. If your water main breaks at two in the morning on a holiday weekend and you don’t want to pay a plumber holiday rates, you’ll need money to pay for a hotel. Homeowners have a greater financial responsibility over and above the initial down payment, are you ready for that?
-OK already, I’m ready, now what?-
Having established to the best of your ability your preparedness for owning a home, I would suggest pre-qualifying for a mortgage. There are a couple of benefits to this, so let’s explore them. Pre-qualifying hastens the buying process. Sellers are more willing to choose a pre-qualified seller over someone who has yet to enter the qualifying process. Qualifying for a home can be a lengthy process depending on your situation. Being pre-qualified, a seller is confident they’re dealing with someone who can afford the home in question and tentatively complete the sale as long as no problems arise later on. Secondly, it allows you to know up front, before you search, how much you have to spend. There is nothing worse than getting your heart set on a home only to find out that you don’t qualify for enough to even be looking at it in the first place.
And finally, when qualifying, your potential lender will qualify you for a mortgage with a payment of approximately 28% of your gross monthly income. With your other long-term obligations (car loans, credit cards, student loans etc.) your monthly debt should be no more than 36% of your gross monthly income. This will allow you the option of waiting for a raise in income to substantiate a higher mortgage payment or forge ahead and begin looking.
-Don’t get clouded vision when it comes to the search-
Once you begin searching, try, as hard as it might be to remain objective about the homes you look at. A real estate agent can help in the process or you may find you want to go it alone. There is no specific right way of home searching; it’s merely based on personal preference. Be realistic about the home you choose, and make sure you are completely 100% satisfied when you think you’ve found the right home. You’ll spend quite a few years there, and if you suspect you may outgrow the home quickly keep looking. The searching part of home buying is the longest step, so be patient. You don’t want to make a 30-year mistake!
-Making an offer aka let the games begin!-
The negotiation of your final purchase price can seem like a game in some cases. And in some cases that is exactly what it is. However, be reasonable with your offer. Many people feel that if they’ll have to repair or replace even the most minor cosmetic blemish, it substantiates a significant discount of the purchase price. This isn’t always the case and you can quickly loose a home you’ve set your sights on if you get greedy with the discount you’re proposing. Keep in mind that even fixes to make the house more aesthetically pleasing can be worked into the contract. You may get the buyer to agree to discount the purchase price, lower the down payment, or fix the problem before you buy the house. Be ready to negotiate and come to a happy medium for both of you. Unless you’re an expert with home values in the area or the cost of home improvement you should always be open to suggestions from your realtor or other person who is an expert in these areas.
-Closing costs from the other side of the table-
As a former title and escrow professional, I can assure you that the closing costs can be costly. (No pun intended) It’s apparent in many cases and for some reason or another, the buyer isn’t aware of the costs. When they see the amount on the settlement statement the shock quickly turns to a demand for explanation and justification of the fees. First of all, title insurance is a requirement by all lenders. This insures that there are no problems with the title that will pose a problem later on with ownership. There are lender’s and owner’s policies issued and both cover different aspects of coverage tailored to the buyer and lender. Title insurance is based on the purchase price so it isn’t unusual for it to be over a thousand dollars or more.
Other closing costs include document preparation fees, title report preparation, and any commissions for the real estate agents etc. The fees are broken down into two columns, one for the buyer and one for the seller so each can see what they’ll be expected to pay. Definitely request an explanation of the fees, but be reasonable in your expectation of the costs surrounding the biggest purchase you’ll make in your life. If necessary ask a friend or consult the paperwork you have when you bought a car. You’ll quickly find there are fees involved with any large purchase; home buying is no different.
(Remember, if you’re trying to get out of paying title fees, their state-banking department governs the company. They cannot waive fees that have been filed with that department for auditing reasons. It’s nothing personal it’s the law.)
-Stay on top-
No matter how long it takes, being informed of the details throughout your transaction is important. Make it a point to call the agents you’re working with every couple days to see how your process is coming along. Finding out about potential snags as they happen or are discovered can greatly reduce the headache if addressed quickly. In some cases money you’ve deposited can be forfeited if you don’t exercise due diligence. Dragging your feet can cost you in the end.
Overall, from start to finish, be patient. There are a lot of factors and actions that have to be accomplished before the title to a property is deeded to you. It isn’t something that is easy and there may be many stumbling blocks along the way. Each situation is different and you need to remember this. In the end if you discover right now may not be the time to buy, use the information and experience you’ve gained to better prepare yourself in the future for home ownership.