The What’s, Why’s and How’s of Home Ownership
Buying a home is an important decision. It is usually the single largest purchase you will make. Leveraging the right resources and taking your time to prepare for the purchase will help make this important step an easy one. Here are some of the most popular questions and answers that will help you as you enter the housing market. Let’s call them the what’s, why’s and how’s of home ownership:
1. Why should I buy, instead of rent?
Answer: You'll love the feeling of having something that's all yours - a home where your own personal style will tell the world who you are. A thriving vegetable garden in the backyard, a tiled entryway, a yellow kitchen...when you own, you can do it all your way! But there's more to owning a home than personal satisfaction. You can deduct the cost of your mortgage loan interest from your federal income taxes, and usually from your state taxes, too. And interest will compose nearly all of your monthly payment for over half the number of years you'll be paying your mortgage. This adds up to hefty savings at the end of each year. And you're also allowed to deduct the property taxes you pay as a homeowner. If you rent, you write your monthly check and it's gone forever. Another financial plus in owning a home is the possibility its value will go up through the years.
2. Should I use a real estate agent? How do I find one?
Answer: Using a real estate agent is a very good idea. All the details involved in home buying, particularly the financial ones, can be mind-boggling. A good real estate professional can guide you through the entire process and make the experience much easier. A real estate agent will be well-acquainted with all the important things you'll want to know about a neighborhood you may be considering...the quality of schools, the number of children in the area, the safety of the neighborhood, traffic volume, and more. He or she can help you contact a mortgage company who can help you figure the price range you can afford and get you pre-approved for the mortgage (an important step before you start to look). With immediate access to homes as soon as they're put on the market, the agent can save you hours of wasted driving-around time. When it's time to make an offer on a home, the agent can point out ways to structure your deal to save you money. He or she will explain the paperwork, and be there to hold your hand and answer last-minute questions when you sign the final papers at closing. And you don't have to pay the agent anything! The payment comes from the home seller - not from the buyer.
3. How do I find a lender?
Answer: You can finance a home with a loan from a bank, a savings and loan, a credit union, a private mortgage company, or various state government lenders. Shopping for a loan is like shopping for any other large purchase: you can save money if you take some time to look around for the best prices. Different lenders can offer quite different interest rates and loan fees; and as you know, a lower interest rate can make a big difference in how much home you can afford. Talk with several lenders before you decide. Most lenders need 3-6 weeks for the whole loan approval process, but should be able to pre-approve you within 24-48 hours of your initial contact as long as you can supply them with the information they need. Your real estate agent will be familiar with lenders in the area and what they're offering.
4. How much money will I have to come up with to buy a home?
Answer: Well, that depends on a number of factors, including the cost of the house and the type of mortgage you get. In general, you need to come up with enough money to cover three costs: earnest money - the deposit you make on the home when you submit your offer, to prove to the seller that you are serious about wanting to buy the house; the down payment, a percentage of the cost of the home that you must pay when you go to settlement; and closing costs, the costs associated with processing the paperwork to buy a house. When you make an offer on a home, your real estate agent will put your earnest money into an escrow account. If the offer is accepted, your earnest money will be applied to the down payment or closing costs. If your offer is not accepted, your money will be returned to you. The amount of your earnest money varies, but will usually be between $1000 and $2000, depending on the cost of the home (if you use 1% of the purchase price as a guide, you will probably be safe). The more money you can put into your down payment, the lower your mortgage payments will be. Some types of loans require 10-20% of the purchase price, but in today’s market, depending on your credit history and income levels, you might qualify for 100% financing. Closing costs - which you will pay at settlement - average 3-4% of the price of your home. These costs cover various fees your lender charges and other processing expenses. When you apply for your loan, your lender will give you an estimate of the closing costs, so you won't be caught by surprise. That estimate is called a good faith estimate and is required by law to be provided to you within 3 days of your first discussions with the lender.
5. What information will the lender need for a pre-approval?
Answer: Some programs may require little or no documentation while others may require additional information depending on your qualifications and history. Talk with your lender to determine exactly what they need. Here is a quick list of the basics that you should have ready for any lender:
· W-2’s for the last 2 years and paystubs for the past 30 days
· 1040’s for the last 2 years if you are self-employed or receiving commission income
· Two of your most recent statements for checking and/or savings accounts
6. When I find the home I want, how much should I offer? Answer: Again, your real estate agent can help you here. But there are several things you should consider:
· Is the asking price in line with prices of similar homes in the area?
· Is the home in good condition or will you have to spend a substantial amount of money making it the way you want it?
· How long has the home been on the market? If it's been for a while, the seller may be more eager to accept a lower offer.
· How much mortgage will be required? Make sure you really can afford whatever offer you make.
· How much do you really want the home? The closer you are to the asking price, the more likely your offer will be accepted. In some cases, you may even want to offer more than the asking price, if you know you are competing with others for the house.
7. What if my offer is rejected?
Answer: They often are! But don't let that stop you. Now you begin negotiating. Your agent will help you. You may have to offer more money, but you may ask the seller to cover some or all of your closing costs or to make repairs that wouldn't normally be expected. Often, negotiations on a price go back and forth several times before a deal is made. Just remember - don't get so caught up in negotiations that you lose sight of what you really want and can afford!
8. Make the entire process FUN!
While buying a home is an important step, and the process can be somewhat stressful, we strongly suggest that you make the process fun and enjoyable. Imagine what it will be like living in the homes you choose to see. Dream a little! You are looking for the home whose “spirit” screams out to you “This is it!” Don’t settle for something, but find that special property where you can enjoy the experience of homeownership.
Source: US Department of Housing and Urban Development, www.hud.gov
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