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Getting Started with the Home Purchase Process
Financial Considerations
Purchasing a home is a major financial responsibility. Because your money will only stretch so far, you need to buy a home that fits within your budget. Lots of people don’t even consider buying a home because they are afraid they will not be able to afford it. But often home ownership is within your reach, particularly with some of the special programs available to first-time home buyers. In fact, sometimes home ownership is just as affordable as renting, and in some cases, even more affordable.
Home ownership can actually add to your savings as mortgage payments help build your net worth. As opposed to rent payments, a portion of your mortgage goes toward building equity (i.e. the difference between the market value of a house and the amount still owed on the mortgage). As you pay off the mortgage, you owe less on the home and “own” a larger share of it.
Another financial benefit of home ownership is that mortgage interest payments are deductible. By owning a home, you can write off the interest on your mortgage on your tax return. In many cases, this will take you above the minimum itemized deductible, allowing you to write off many other items.
On the flip side, there are some situations where renting may be a better financial situation than buying a home. If you will be in a particular community for under three years, if the local economy is not doing well, if unemployment is rising, or if your future income will not provide you with enough for mortgage payments and other financial responsibilities to owning a home, then renting may provide the better option.
When people start thinking about buying a house, one of their first questions is “How much can I pay for a house?” Look at yourself through the eyes of the lender. Banks want to make sure you are able to afford the home you buy and they will decide if you meet their mortgage requirements.
As a general guide, you can purchase a home worth two or three times your annual income, depending on your savings and debts. Your total monthly payment for housing expenses, which include mortgage principal, interest, taxes, and insurance (PITI), should not exceed 30-40% of your total monthly income.
Your Credit Report
Your credit history is a critical factor when obtaining a mortgage loan. It communicates your past willingness and ability to meet credit obligations and gives the lender a good idea about how responsible you will be in making your monthly mortgage payment. Do not despair if your credit report is less than stellar. If you’ve made some mistakes in the past but your current credit patterns are good, many lenders will take that into account and may be willing to make you a loan.
Get a copy of your current credit report. Verify that all of the information is correct, and if it’s not, contact the credit reporting company and have them make corrections where possible. If the inaccurate information involves debts that are still outstanding, or other derogatory information reported by your creditors (such as department stores, hospitals, contractors, etc.), you will need to contact the creditor(s) and work out a way to have this information removed from your credit report.
It’s important that you do everything possible to make your credit report as clean as possible before applying for a loan. One of the best things you can do is pay off all of your credit card debt and then close all of your credit card accounts except for one or two at most.
The bottom line is that a good credit report is your passport to obtaining a loan. A bad credit report won’t necessarily prevent you from getting a loan, but you may need to do some work to clean it up and make it acceptable to a lender before they’ll make a loan to you.
Type of Home
How should I decide between purchasing a house, a townhouse, or a condominium? Your decision depends on how much responsibility you want to take on, as well as personal lifestyle preferences. Below are descriptions and/or the pluses and minuses of each type of home or type of ownership.
House
Pluses/ Minuses
• Provides most living space
• Offers greatest amount of ownership & control
• Do not need permission for changes
• Most often maintains its market value well
• Most expensive option
• Requires time and money to upkeep
Condominium
Pluses Minuses
• Less expensive option
• Condo association oversees common expenses and external upkeep
• Slower to rise in value
• Need permission to make changes
Townhouse
Townhouses are individually owned, but are physically attached to other units. They are usually two or three stories, and may have a small yard attached. Townhouses are usually less expensive than houses, but have less privacy. Because one or more walls are shared, noise can seep in from neighbors. When looking at townhouses, check the noise level by visiting the place when neighbors are home and active. A townhouse can follow the condominium or co-op management models.
Size of Home
When looking to purchase a house, people often become infatuated with a home that is not quite suited to their needs. It is either too small, too large, or in a location that is not the most convenient. So how do you determine what size house you need?
Of course the biggest concern is price. You should look over your budget carefully and research the market as well as the neighborhood. It is also a good idea to meet with your banker or financial advisor to see what you can really afford. You should then think about what aspects of a house are most important to you. How many bedrooms or bathrooms will you need? Do you need a basement or an attic? Will you want a front yard, a back yard, or other amenities? What type of home are you looking for; a house, townhouse, or condominium? These are just some of the types of questions to consider when deciding what size home to buy. Another important question is what are your plans for the future. Are you single and planning to stay that way or are planning on starting or growing your family? Knowing the answers to these questions in advance will not only help you determine the size of home you need, it will also save you time and money in your home buying process.
New Home
While you may have to wait longer to move into a new home, new construction offers the buyer several advantages:
• New homes are more energy efficient. With improved heating and cooling systems, better windows, and greater use of insulation, new homes utilize half as much energy as home built before 1980.
• New homes require less maintenance. Newer homes often come with siding and trim that never need painting. Pressure-treated wood that is resistant to rot and insects is also used.
• New homes have more amenities. The kitchens in new homes come already built with dishwashers, refrigerators, and other appliances. Bathrooms also often come with more convenient features such as large mirrors and medicine cabinets. There are also more electrical outlets and cable tv and telephone outlets in new homes.
• New homes are safer. Electrical systems in new homes are better sized for the heavier electricity demands of today’s homes, and thus less likely to cause fires. Smoke detectors are often hard wired on every level of a new home and ground fault interrupters for bathrooms and kitchens reduce the chance of fire or electrocution.
Existing Home
Statistics have revealed that homebuyers select older homes over new ones in two out of three instances. However this is a choice that each buyer needs to make for him or herself. Some of the advantages to buying an older house include:
• More space for the money. Many older homes have more ample bedroom space. Often buyers willprefer a home with fewer rooms that are more spacious to a house with more rooms that are smaller.
• Nicer Landscaping. The lot of an older home is often planted with trees and shrubs by previous owners and therefore presents fewer landscaping problems.
• Better location. Buyers should not fail to weigh the shorter commuting distances to offices, schools, and other frequent destinations afforded by older neighborhoods.
• More stable taxes. Homes in established neighborhoods have fairly predictable assessed values (county tax valuation) since they’ve been bought and sold several times.
• More charm and individuality. Today, many new homes in a subdivision are built following one of only a handful of plans. Most homes in older subdivisions are unique in design, giving the neighborhood a lot of character.
• Higher quality of construction. Slate roofs, brick and stone construction, plaster walls, hard-wood floors, and other high-quality materials that are fairly common-place in older homes — are virtually non-existent in new homes.
Using an Agent
A good real estate agent makes the home buying or selling process much more efficient and saves you an incredible amount of work. Listed below are some frequently asked questions about dealing with real estate agents and brokers.
What is a real estate agent?
Real estate agents are licensed by their state to assist clients in buying and selling property. Agents are required to take courses in real estate, including coursework in real estate law, real estate financing, and listing. After completing their studies, prospective agents must pass both a national and state exam before they can work for a broker. A real estate agent must “affiliate” with a broker once they pass the exam — they cannot practice real estate on their own.
What is a broker?
A broker is a person licensed to own and operate a real estate firm. Brokers must undergo exhaustive classroom training and pass a stringent examination before they can operate their own firm. The main broker at a firm is called the “Principal Broker” and is responsible for the actions of his or her agents. “Associate Brokers” are real estate agents who have met all of the requirements of a principal broker but are not operating their own firm.
What is a REALTOR®?
A REALTOR®, pronounced “reel-tor” is a licensed real estate agent who is also a member of the National Association of REALTORS® (NAR) trade association. REALTORS® have sworn to follow a set of prescribed rules and regulations, the most important of which includes standards of conduct and ethics in their dealing with the public.
What does a real estate agent do?
Real estate agents advise and assist you through the entire buying process, from deciding what type of home you want and finding it to tracking the progress of your loan application. Once you have found a home, the agent helps you to prepare an offer and negotiate with the seller. The agent then follows-up on all the necessary paperwork, including the mortgage application, setting up a home inspection, and coordinating the work of the attorney, title company and any other people necessary to complete the deal. An agent does not arrange a mortgage or other financial assistance. However, agents can recommend mortgage companies, attorneys, inspectors and other professionals for you to interview.
If you are selling your home through an agent, the agent will provide you with a comparative market analysis (CMA) showing recently sold homes in your area that will help you set a price for your home. They’ll also explain their marketing plan of advertising, direct mail campaigns, open houses, promotion of your home to other agents, and other steps they plan to take to ensure a quick sale of your home. They’ll also take care of the dozens of critical details that need to be addressed after an offer to purchase your home has been made. Homeowners who elect to sell their home on their own often overlook the fact that a large part of the work is not just marketing and selling the home, but making sure that the sale actually gets to the settlement table.
How is a real estate agent paid?
Most often, real estate agents receive a commission based on the purchase price of the home. This commission varies according to the agent. The seller usually pays an agent’s commission, but this can also be decided as a part of the negotiations.
What is Buyer Broker vs. Seller Agent?
When working with a real estate agent, you need to understand their “agency” relation to you. You want an agent that best represents your interest. Buyer agency came about in the 1980s as a solution to rising confusion over whom agents work for. Under the conventional system, an agent could work for both a buyer and a seller, which could lead to a conflict of interest. The agent’s obligation was to the person paying their commission, regardless of who contacted the agent first. This meant an agent was not necessarily representing the buyer’s interest in obtaining as low a home price as possible, as well as providing a full selection of properties to choose from.
Buyer Agency. A Buyer’s Broker represents the home buyer. They can provide the buyer with information about a home, area, prices, etc. that a seller’s agent, by law, cannot and they can also inform the buyer of the bad as well as the good about a property. Since the Buyer’s Broker is working for the buyer, he or she does not try to sell a property, but helps in buying one. This makes the home buying process less stressful and intimidating. When the buyer calls a real estate agent or company off a sign in the yard of a home or an advertisement, or an open house or work with an agent whose company has the property listed, that agent and that company are working for the seller.
Seller Agency. A Seller’s (or Traditional) Agent represents the seller. They are bound by law to get the seller the best possible price and terms and not divulge any information to the buyer that would be contrary to the seller’s best interest. This agent cannot legally negotiate on the buyer’s behalf. It is also the duty of the seller’s agent to tell the seller any information that you, the buyer, entrust to them. This includes any information that would weaken the buyer’s bargaining position.
What is Dual Agency?
As a seller, you should find out about your agency’s policy on “Dual Agency”. Dual agency is when an agent in the selling agent’s office brings in a contract on the home. Because both agents are working for the same broker, they cannot provide single agency representation. If the broker does not have a policy, you may want to reevaluate the agency you are using.
