10
Steps of Home-Buying
1. Should I rent or buy
?
2. How Much Can I Pay for a Home ?
3. What Kind of Home do I want?
4. Pre-Qualification
5. Begin House Hunting
6. Inspect the Home
7. Make and Offer
8. Apply for a Mortgage Loan
9. Get a Professional Inspection and contact
your Insurance Agent
10. Close the Loan.
1. Should I rent or buy ?
Over time, rents tend to rise. But with home ownership, the basic cost stays
the same. This stable cost, along with increasing equity, is what makes home
ownership financially attractive in the long run. However, big responsibilities
are attached to the freedom that home ownership brings. These include the duties
of maintenance, repairs, and making the mortgage payments. Take a look at your
goals, commitments, and lifestyle before making a decision.
Return to top
2. How Much Can I Pay for a Home ?
If you are curious about how much house you can afford, here is a quick rule
of thumb:
Most people who have good credit and a steady income and do not owe a lot of
money can afford to buy a home that costs 2 ½ to 3 times their annual
income. For example, a family earning $30,000 a year, with monthly credit
card and car payments less than $200 and a good credit rating will probably
qualify for a mortgage loan to buy a home that costs between $75,000 and
$90,000. Use this rule to calculate how much house you can afford.
Return to top
3. What Kind of Home do I want?
What do you want in a house? Consider the number of people you expect to be
living in your new home and their ages. Next, consider your future family
size and age. Then, ask yourself what your family size means in terms of
a house. Now, consider your other living needs and the things you and your
family likes to do. Make a list to help define your dream home. Then, decide
which features on your wish list you would really hope to get and which you
cannot live without (“hope to have” and “must have”.)
Return to top
4. Pre-Qualification
“Will I get qualified for a mortgage loan?” Nobody can answer you except for
yourself (and the lender). To find out about the answer, look at yourself through
the eyes of a lender. Every lender wants to make sure you can afford the home
you want to buy, which means you are likely to repay the loan.
To answer this question, all lenders look at four different factors called
4 Cs of credit:
Capital:
The amount of money you have available to
make the down payment, pay the closing costs, and keep to
pay for unexpected expenses
Capacity:
Refers to your ability to make the monthly
mortgage loan payments and als0 pay all of your other bills.
Credit History:
Lenders want to know how much money you owe
to others, how often you use credit and if you pay your bills
on time.
Collateral:
The house you are buying will be collateral
or extra security for the loan.
Return to top
5. Begin House Hunting
There are many ways to find your dream house. Most house hunters try several
di8fferent ways before they find “the” house. Here are some suggestions:
Drive through the neighborhoods you have picked and
look for “for sale” signs. Call the number on the signs
for information or ask your real estate agent to look up
the information for you.
Visit open houses. In most communities,
Sunday afternoon is the best open house day.
Read real estate shopper magazines.
Check newspaper ads.
Watch the real estate channel on
your local cable network.
Ask friends and relatives who
live in the neighborhood to let you know of anyone who is
planning to move.
Contact local lenders, FHA,
and VA about real estate owned (REO) houses they have taken
back through foreclosure and are now reselling.
Attend auctions. Auction properties
are generally sold “as is.” Check them carefully before going
to the auction. You may also need to be pre-approved for
a loan in order to bid.
Call non-profit community redevelopment organizations to
ask about neighborhoods where special loan programs are
available for low-and-moderate-income homebuyers.
Attend tax and foreclosure sales.
You may hear that you can get a great deal buying houses
at tax or foreclosure sales. There are the sales that take
place when borrowers do not make property tax or mortgage
loan payments and the state or the bank takes the property.
Each state has different laws that control how these sales
are handled. Most states have laws that protect the homeowner
to the point that it can be very difficult and risky to buy
homes at theses sales. Always get professional advice from
a lawyer or a real estate agent before you try to buy at
a tax or foreclosure sale.
Work with a real estate agent.
You might also need to make a list of the things
about a neighborhood that may be important to you.
Here is an example of the list:
- General safety and desirability of the neighborhood
- Condition of other homes in the area
- Quality of the local schools
- Distance from your job
- Availability of public transportation
- Recreational activities, parks, playgrounds
- Easy access to shopping
- Places of worship.
You might probably make a decision to buy a
home based on features and price. You have already decided
what features you want. But, how do you tell if the price the
seller is asking is right? Houses are usually sold at market
value, that is, the price that a buyer is willing to pay to
a seller with whom he has no relationship (such as a brother,
employer, best friend) when there are many other houses to
choose from. You can tell if the house is priced at market
value by finding out the recent sale prices of similar homes
in the same area, how long the home has been on the market,
how anxious the owner is to sell, and the condition of the
house. Your agent can give you addresses and prices of comparables,
or similar homes that have sold or that are currently available
for sale.
Return to top
6. Inspect the Home
Getting a professional property inspection-before you make an offer on a house-
may save you money and give you peace of mind. The inspection tells you whether
the house meets minimum housing standards and complies with local building
codes. A licensed home inspector also can spot possible problems that you may
not see. You can then ask the seller to lower the purchase price by the amount
it would cost you, the buyer, to make those repairs.
Make an appointment to see the house at a time when the owner will not be home
and you can spend plenty of time looking around. If you are buying a “fixer
upper,” definitely invest in a professional homeinspection before you make
your offer. If the house is newer or appears to be in good repair, use the
How to Look at Houses Checklist as a guide to help you look carefully at
the house. Then, make your offer contingent upon a satisfactory home inspection.
With a flashlight, look into dark areas in the attic, the basement, and crawl
spaces for evidence of mold, dampness, insect infestation, rotting wood,
etc. Turn on faucets and flush toilets to test water pressure. Look for leaks,
bulges, or discoloration in walls and ceilings. Listen for creaks in the
floorboards that might bother you. Flip light switches. Turn on all of the
appliances that will stay with the house to see if they work properly. Check
to see if all the window screens are available and in good repair.
Get a
Home Inspection Checklist.
Get a house hunting checklist
add link to doc
How to look
at houses?
Return to top
7. Make an Offer
The most important question to answer before making an offer
on a house is, “what are you willing to pay?” That question
has two parts; “what is the fair market value of
the house?” and “what is it worth to you?”
Fair Market Value
Fair market value is a term that bankers, appraisers, and real estate agents
use to describe the price a typical buyer is willing to pay to a seller who
is not under pressure to sell and with whom the buyer doesn’t have a personal
relationship with.
To figure out a home’s fair market value, you should look
at:
- The price of comparable or similar houses. Your house
should be in the same range as others in the area. Appraisers
only look at homes that have sold, but you will also want
to look at what is available now because prices in the area
could be going up or down.
- The features your house has that others do not that would
make it more or less valuable than the others in the neighborhood.
A big, corner lot adds value, for example, while a lack of
covered parking makes a house less valuable.
- The price per square foot of your house compared to others.
Size of homes in most areas is calculated in square feet.
Your agent can tell you the square footage of the house you
like. Divide the asking price by the number of square feet
to get the price per square foot. For example, a typical
three-bedroom ranch has 1,700 square feet. If the asking
price is $87,000 the price per square foot is $51. If all
of the other homes in the area sold for $45 per square foot,
the seller may be asking too much. This information should
be available in the appraisal.
You also want to know if there are many other houses for
sale that you could choose from. If there are lots of homes
like yours, it is a buyer’s market and you can drive a harder
bargain. If homes seldom become available in this area and
many people are interested, it is a seller’s market and you
may pay a slightly higher price to get what you want.
Finally, you want to know why the owners are selling. If
they need to move soon, or if the house has been on the market
a long time, they may be willing to take a lower value. Ask
your agent if there have been other offers or if the price
has already been reduced.
What is it worth to you?
Fair market value is what the typical buyer is willing to
pay, but only you can determine how much you are willing to
pay. Real estate agents should not tell you what you have to
offer, but they can help you in reaching a decision.
In deciding how much to offer, start with fair market value
and subtract the cost of things that you will have to replace
right away, like carpet or a roof. Then add dollars for things
this house has that are important to you: for example, a sunny
location, closeness to a bus stop, new appliances. Subtract
dollars if the sellers are anxious to move quickly and add
dollars if it is the only house like it that is available in
the neighborhood. There is no exact science to this. It is
your decision. Once you decide on an offer price;
Figure out your monthly housing costs, including payment
on the principal (the actual loan amount), payment of interest,
taxes, and insurance. These four costs are called PITI. To
the PITI add other fixed housing costs, such as utilities
and homeowner association fees, and decide if you are going
to be comfortable making these payments.
The Offer
The offer is a written purchase proposal. In some states, if a seller accepts
your offer the signed proposal becomes a purchase contract. In other areas,
your agent or your settlement attorney will prepare a real estate purchase
contract with all of the same terms that you and the seller agreed to in
the offer. Once the offer is signed by the buyer and the seller, you have
a binding contract even if the final purchase contract has not been written.
If you back out of the contract, you can lose you earnest money and you could
be sued by the seller.
The offer should include:
- The price
- The amount of earnest money or good faith money you will
put down and who will hold the moneyuring the escrow period.
Your agent can tell you how much earnest money is normal
in your area. It may range from $1,000 to 2 percent of the
offer amount
- The legal names of all of the buyers and sellers
- The address and exact legal description of the house
- The closing date
- Any other important dates, such as the date by which the
inspection must be done
- How you intend to pay for the property. If a loan is involved,
the contract is usually contingent on the bank approving
the loan. If the bank will not lend you the money, you get
your earnest money back.
- A list of any property you expect the seller to leave in
the house, such as carpet, appliances, hanging lamps, draperies
- All contingencies
- A breakdown of who is paying the closing, title, loan,
and escrow expenses and the cost of any required inspections
- A time limit for the seller to accept the offer. It is
important to try to get the seller to make a decision on
your offer as quickly as possible so that he or she does
not show your offer to other interested buyers to try to
get ahigher price
Return to top
8. Apply for a Mortgage Loan
Now that you have found your dream home and your purchase offer has been accepted,
you need to get a mortgage loan. You may already have started the mortgage
loan process by getting pre-qualified. If not, the first step is to choose
a lender. Mortgage loans are made by banks, savings and loans, mortgage companies,
credit unions, and private individuals. Often, you will deal directly with
the lender who will lend you the money. Or, you could work with a mortgage
broker who takes the information from you and then tries to find a lender
that will loan to you.
Steps in the Loan Process
a. Choosing a lender:
When you choose a lender, you certainly want a lender with the lowest interest
rates. But, you also want to choose a lender who will take the time to work
with you to help you get the loan.
b. Documentation:
Start pulling out, sorting and copying all the documents you have saved to
prove the information you will report on the mortgage loan application. You
will not get your mortgage loan unless you provide all the required documentation,
which may change depending on the type of loan program and your individual
circumstances.
Get the Documentation Checklist.
c. Meeting:
Arrange for a meeting (of you and any co-borrowers) with
a loan officer. Together, fill in a standard loan application
form. This form asks for all of the qualifying information,
such as, employment history, income, assets, and debts. When
the application is complete, all of the borrowers must sign
it and pay an application fee and credit report fee. These
fees are nit refunded if you do not get the loan.
d. Good Faith Estimate and Truth-in-Lending Statement
Within three business days, the lender is required by law
to send you two documents: a Good Faith Estimate of your settlement
(closing) costs and a Truth-in-Lending statement.
The Truth-in-Lending statement gives the terms and cost of
your mortgage loan, including the loan amount, the interest
rate, the total amount of money you will pay over the life
of the loan, the amount of interest you will have to pay in
advance (called “points”), and the annual percentage rate (APR).
APR is the actual interest rate you are paying when you add
the points (interest paid in advance) and the interest paid
monthly.
e. Verification
Next, the loan officer turns your application over to a loan
processor who orders:
a credit report to check that your credit is good and your bills are paid
An appraisal on your future home. Your home is the collateral for your loan,
so the lender must make sure that it is worth the amount of money you are borrowing
and that it is in good repair.
Verifications including: employment, income, other income (such as alimony
payments, AFDC, or Social Security benefits, dividends from investments, assets,
deposits, and rent payments.)
f. Processing:
You may receive letters from the loan processor telling you
what documentation has not yet been received. You must provide
all necessary explanations, receipts, and other documents the
processor asks for.
g. Underwriting:
The underwriter is the person who recommends whether or not
you qualify for a mortgage loan. The underwriter will base
this decision on the 4Cs of Credit. (They can click on it.)
The underwriter may approve your mortgage loan subject to certain
conditions. For example, if the property needs repairs, the
underwriter may state that your mortgage loan is approved on
the condition that the roof has been repaired or that money
has been put aside for the repair of the roof. The underwriter
may also request more information to prove that what you said
in your application is true.
h. Loan Commitment:
If the underwriter determines that you are a good credit
risk, you will receive a commitment letter stating that the
lender will loan you a certain amount of money for the purchase
of your new home. The letter also will state what your monthly
payments will be. The commitment letter is a legal document.
You should read it carefully to be sure it is accurate and
that you understand everything in it. You must sign the commitment
letter and send it back to the lender.
*** Rejection***
If the underwriter determines that you are not a good risk,
you will receive a rejection letter. By law, the lender must
tell you why your request for a mortgage loan was denied. Mortgage
loan applications are denied for a number of reasons; however,
a lender is in violation of federal law if the lender refuses
to make you a loan based on your race, religion, age, color,
national origin, gender, marital status, or receipt of public
assistance. Some legal reasons for denying credit include:
- Poor Credit: If you are rejected because of information
in your credit report, you are entitled to a free copy of
the report. Request it.
- Low Appraisal: If the appraisal said the value of the
house is less than the price you agreed to pay, you can ask
the seller to accept a lower price. The seller is not obligated
to reduce the price, but if he or she agrees, the lender
will underwrite the loan again based on a smaller loan amount.
If the appraisal indicated that the house needs repairs,
you can either ask the seller to pay for them or put aside
your own money for the repairs.
- Insufficient Funds: Most mortgage loans require that the
borrower make some amount of down payment. If you do not
have enough of a down payment, you may be able to get assistance
from a community-based non-profit housing organization, or
you may have to save for a little while longer.
High Debt: You have two choices: finding a less expensive house, or start
paying off your debts.
Return to top
9. Get a Professional Inspection and contact your
insurance agent
Get a Home
Inspection Checklist.
Your lender also will require a professional appraisal of
the home to decide its market value. Also,
you will want to do a final walk-through inspection one or
two days before the closing to make sure that the house is
in about the same condition it was at the time the offer was
made and that all of the appliances still work.
As soon as possible after the offer has been accepted, you
should find a professional home inspector and make an appointment
to meet him or her at the property. You will usually have to
pay the inspector on the day of the inspection. Within a few
days, the inspector will send you two copies of the written
inspection report. Your lender will want one copy.
If there are problems with the house, that are so serious
that you no longer want to buy it, you must send a letter to
the seller and to the escrow officer stating that you are canceling
the contract because of structural problems. Include a copy
of the inspection report with your letter.
While you are doing this, the seller will contact a pest
inspection company and get a certificate saying the house is
free of termite or pest infestation. If there are pest problems,
sellers usually will pay to solve them so that they can get
the certificate.
In some areas of the United States, other types of inspections
are done at this time, such as those to detect lead paint or
radon gas, or to check water quality and septic systems. Your
agent will tell you what types of inspections are required
and who usually pays for them. If these inspections show problems
that make the lender unwilling to make the loan, the seller
can try to solve them or refund you money and cancel the sale.
Insurance
About a week or so before the closing, you will have to contact
your insurance agent to get hazard, flood, or any other special
insurance you need. Your agent usually orders the tit6le search
and title insurance policy. Your lender will need a copy of
the title report. If there are problems with the title, the
seller will have a period of time, usually 30 days, to solve
them or the contract will be canceled and your money returned.
In addition, there are three other types of insurance that
you may hear about. They are:
This type of insurance is almost always required by the lender
if your down payment is less than 20 percent of the price of
the house. It protects the lender in case you don’t pay your
mortgage and the lender has to foreclose. It is always required
on new FHA loans. You will usually pay a mortgage insurance
(MI) fee at closing, and then you will pay a monthly MI fee
as part of your mortgage payment. Your lender will make all
of the arrangements for the mortgage insurance.
This is a form of life insurance that pays off your mortgage
if you die so that your family can continue to live in the
house even without your income. Some lenders will send you
information recommending that you get mortgage life insurance,
but it is not required. You should talk to your own insurance
agent to decide whether mortgage life insurance is a good idea
for you and whether you should consider term life insurance
instead.
This is also optional. It protects you against the cost of
high repair bills if the heating, plumbing, air conditioning,
or appliances break down during the first year you move in.
There are also a few things that need to be done before the
closing day:
- At least 24 hours before the closing, both you and the
seller get a copy of the
settlement statement (HUD-1), which shows all of the costs of the sale and
who pays for them. It tells the sellers how much money they will get at closing
and tells you how much money you will need to close.
- You will need to get a cashier’s check for this amount
and take it to the escrow
agent.
- You will meet with the lender to sign the mortgage papers.
Be sure to allow enough
time to have the utilities transferred to your name as of the closing date.
You should also arrange for the phone to be installed. You may have to pay
deposits for these services.
Return to top
10. Close the Loan
The closing is the day when the seller receives the check
and the buyer receives the deed to the property. It is the
formal meeting at which you take official ownership of the
property. Actual possession of the property varies according
to local practice and the terms of the contract. In some areas,
the closing is a formal meeting that both the borrower and
seller must attend to sign the papers that are required for
the sale. In other areas, the papers are signed in advance
and the closing can be done by mail or can be handled by a
real estate agent or an attorney. Ask your homebuyer education
instructor what you can expect at a closing in your area.
At closing, the buyer requires that the seller’s prove the
title (ownership) is complete and free of anyone else’s claims.
Technically, two separate closings occur at this time: the
closing of your loan, and the closing of the sale.
You should be prepared to take as much time as you need to
read over the loan documents before you sign them. Make sure
that you understand all of the terms of the loan you are getting.
It is very difficult to change incorrect documents once they
have been signed and recorded. So, ask questions about anything
that does not look right. Especially check to see that your
name is correct, the address and legal description of the house
are right, and the interest rate and monthly payments are what
you agreed to pay.
Closing Costs
Closing costs are paid at settlement. Closing costs are different
from place to place, but usually cost between 1 percent and
2 percent of the loan amount. Lenders must, by law, give you
a Good Faith Estimate of your closing costs no more than three
business days after you fill out a loan application. Lenders
are also required to give you a final cost breakdown on the
HUD 1 Settlement Statement within 24 hours of the closing.
Some of these costs are:
- Title Insurance Premiums
Survey Fees
Real Estate Transfer Taxes
Recording Fees
Loan Origination and Application Fees
Costs for Inspection Reports (If you have not paid for them earlier)
Attorney or escrow fees
Escrow Impound Account Deposits
After the meeting, the closing agent officially records the mortgage and deed
at your local government clerk’s office or registry of deeds. This legal
transfer of the property may take a few days. The closing agent usually will
not disburse the funds to everyone who is owed money from the sale until
the transaction has been recorded. It is at the point of deed recordation
that you become the official owner of the home.
Then,….move into your new home!!!!!
***Closing-Related Tax Tips for Buyers and Sellers***
There are certain tax benefits for buyers related
to closing:
Some of your costs at the time of closing can be taken as “deduction” on
the year’s income tax return. They include any prepaid
mortgage interest and property taxes (consult your
closing statement).
Points paid at the time of closing represent
additional mortgage interest, and you’re entitled to take as
a deduction not only points you pay, but also any paid by the
seller.
Many of your other closing costs are simply added
to your cost basis for the house. When you sell,
they’ll reduce your capital gain. If laws stay the same,
you probably wouldn’t owe any tax at the point, due to the
generous federal exclusion of gain from a home seller’s income.
Make sure to keep all your records, including
those for permanent improvements, which are also added to your
cost basis. You never know when Congress will change the rules
in the future.
On each year’s income tax return, you may deduct
all property taxes paid on any real estate you own.
You are also entitled to claim as deductions all mortgage
interest paid on a first and second home. Your deduction is
limited to interest on up to a million dollars borrowed to
buy or improve your property, and interest on an additional
hundred thousand dollars in equity loans or second mortgages.
If your borrowing exceeds that amount, consult an accountant
and an estate planner.
There are certain tax benefits for sellers related to closing:
A single taxpayer may take up to $250,000
gain free of federal tax if the house has been owned and occupied
as one’s main residence at least two of the five years before
the sale. To avoid confusion, it helps to think of the requirement
as “two year’s ownership and occupancy…recently.”
Married taxpayers filing jointly who meet
the requirement are entitled to a $500,000 exclusion.
These days, no age limitations apply, no replacement residence
need be purchased, and the exclusion may be used again on another
main home, as often as every two years.
GLOSSARY of Mortgage Terms
Return to top
|
