9 Effective Steps to Buying a Home

June is National Home Ownership Month.  One of the happiest times in my life was when I became a homeowner.  I feel a great sense of accomplishment and have been blessed to remain in my home despite the economic woes of the country and many other homeowners. 

The best time to buy a home is during with fall and winter season when demand is low.  However, many Americans purchase homes during June, the start of the summer season.  Owning a home is one of the best ways to generate wealth.  However, owning a home requires financial discipline and sacrifice.  Create a budget or spending plan to help manage your finances to make sure you can stay in your home for as long as you like and to help reduce the chances of filing for bankruptcy or foreclosure. 

Your monthly mortgage payment should be no more than 32-38% of your total monthly income.  This will ensure that you have extra cash to pay for unexpected expenses and will reduce the chances of using a credit card and going into debt. The advantages of owning a home are:  it increases your credit score, proves that you are a responsible spender, provides stability, provides a tax write-off, increases your financial worth, and provides you with an asset that will appreciate over time.

Renting should be a short-term option not a long-term solution.  Although becoming a homeowner may not be an option for everyone, owning something of value should.  You can:  become an entrepreneur, invest in a profitable business or purchase investment property.

Before you buy a home you need to prepare for the home buying process.  Estimate your monthly mortgage payment. Subtract the difference of the estimated monthly mortgage payment and your current rent (if you pay rent).  Start reducing your spending at least 3 months prior to looking for a home and use the money to save towards downpayment and closing costs and to save the difference between your current payment and your estimated mortgage payment.   Here are 8 tips to help you buy a home:

1.      Fix any errors on your credit and pay down debt

2.      Find a real estate agent

3.      Get pre-qualified

4.      Find the best loan

5.      Use home buying programs

6.      Find a home  and make an offer

7.      Get a home inspection, home energy audit, lead and radon tests

8.      Shop for homeowners insurance

9.      Prepare for settlement and closing and confirm in writing all dates, dollar amounts and what is needed from you

Guest Post - Take the worry about buying a home!

A knowledgeable REALTOR® can help take some of the stress out of the home buying process.  Now let’s see what you can do to take some pressure off of yourself.

Say that you and your significant other have spent several evenings looking at homes over the last several months, or you allocate Sundays to view Open Houses.  One of two things will likely happen and they both will cause you some anxious moments: 1.)  You looked at twenty homes and didn’t find exactly what you were looking for; or 2.) You found the ideal home only to find out that someone has already put a contract on it.  In markets where there is very little inventory and lots of buyers, the speed in which you have to make an offer can be nerve racking.

Purchasing a home is perhaps the most important financial decision you will ever make, let’s face it, it's the largest part of that quality of life that you envision for your family.  If you are experiencing anxiety, it might help if you pinpoint where this uneasiness comes from.

What determines our comfort in any given situation; is our perception that we have things under control.  There are so many moving parts in the home buying process, that it would be impossible to control every outcome; trying to do so would only lead to more stress.  When anxiety sneaks in, try and take a step back and refocus on the 'big picture'.  You already know why you're buying a home!  Psychologist Sue Murrin urges homebuyers to adjust how they think about the process in order to combat stress.  According to Murrin, "we have to tackle our own thoughts as much as taking action on any aspect of the buying/ selling stages.” (article: House Buying Stressful or Fun by Sue Murrin)

Before you identify a home that will be right for you, it is important to try and understand whether you are stressed by the process, or about internal feelings that are within your control.  You can take away some of the stress by addressing some of the unknowns.  Money ― Are you worried about spending too much to maintain a healthy budget?  If so, talk to your agent about showing you homes that may be a little less expensive.  Career ― Is your employment situation likely to change?  If so, deciding to wait until you are sure that your job is stable or salary remains constant, may be a viable option.  Market ― Do you fear that the price of the home may go down in value?  Home prices do fluctuate that we know, but one thing you can do to mitigate this is to make sure you take pride in the appearance of your home, and think of it as an investment for the long-term.

Make sure you’ve done your homework, and once the hard part of searching and buying a house is over, you can now finally enjoy a lifetime of making it yours.

Jason Wrenn

Long and Foster

202.247.7513

Jason.Wrenn@LongandFoster.com

How Student Loans Affect Buying a Home

In an August 2012 report, the Huffington Post stated that college tuition has risen 1,120% since 1978. Since the recession in 2008 banks and financial institutions have been more stringent with approving mortgage loans. In addition to the recent payout of the $25 billion settlement charged by the federal government regarding foreclosures, banks and financial institutions are uneasy about approving risky mortgage loans.

For first-time homeowners or younger borrowers this makes it difficult to get approved for a mortgage loan or for the loan amount desired in addition to the large amount of student loan debt owed.  Many first-time homeowners or younger borrowers have a limited credit history or bad credit along with a modest employment history and low income which makes it even more difficult to get approved. According to the Federal Reserve in the past 3 years only 9% of those ages 29 - 34 were approved for a first-time mortgage, compared to almost 17% approved 10 years ago.

One factor considered in mortgage approval is your debt-to-income ratio (the percentage of your income required to pay your total debt including credit cards, student loans and other debt) which should be between 28% - 36%. Some lenders may use higher ranges up to 45%.  This ratio is used to determine how much you can afford to pay each month towards a mortgage payment. Another factor is your credit score.  If you have a low credit score you may get denied, have to pay a higher interest rate and additional fees or get approved for a small loan.  If you have bad credit (low score) and a high debt-to-income ratio this makes approval even harder.

Student loan debt has reached $1 trillion. Luckily I didn’t have this problem because I received scholarships when I went to college along with assistance from my grandparents. I only had to repay one  small student loan for $5,000 and was able to pay it off within 3 years.

College students who graduated prior to the 2008 recession and those who foreclosed on their homes or became unemployed due to the recession may also be impacted due to their high student loan debt which can take 20 - 40 years to pay off depending on your salary, loan amount and financial situation.

Due to the tough economy it is harder to find jobs that will pay enough to even begin tackling student loan debt and pay for necessary living expenses. Those who earn a modest income will find it even more taxing to purchase a home. This data proves that those wanting to buy a home are worse off than previous generations including their parents.  Here are 13 ways to help you get approved for a mortgage loan if you still owe student loan debt.

1. Use Cash. Pay for items with cash. Stop incurring more debt and pay cash for all items.
2. Consolidation. Explore consolidation options to see if you can combine your student loans into an affordable payment and lower interest rate. However, not all consolidation loans will provide you with a lower payment or lower interest rate.
3. Credit. Fix any errors on your credit report and pay off any late payments to help increase your credit score.  Make all debt payments on time for at least two years prior to applying for a mortgage loan.
4. Down payment. Save as much as you can towards a down payment. You will look more favorable to lenders if you have 20% of the sales price saved for the down payment.  If you can’t afford that, try to save at least 10% for the down payment.
5. Job. Consider getting a second job or working over-time and use the money earned to pay down your student loan debt.
6. Debt. Pay off all revolving debt first such as credit cards or lines of credit, then focus on paying down your student loan debt.
7. Student Loans. Send more than the minimum monthly payment. Pay as much as you can during the first 2-3 years of loan when the greatest amount of interest is accrued.  Make sure you don’t miss any payments.  If you previously deferred on a loan, ask about programs to rehabilitate the loan to put it back in good standing. Once the loan is rehabilitated ask if the negative payment history can be removed from your credit reports to help boost your credit score.
8. Balance. Aim to pay off 30-50% of your student loans to reduce your debt-to-income ratio.
9. Comparison Shop. Start with your local bank or credit union when shopping around for a mortgage loan. Also compare lenders online such as Lending Tree or Bankrate to find the best deal for you.
10. Payoff plan. Start with the smallest student loan first and pay that off, then continuing working your way up to pay off your other loans up to the largest loan.
11. Payment. Use mortgage calculators to determine how much of a mortgage payment you can afford www.bankrate.com/calculators/mortgages/new-house-calculator.aspx
12. Extra. Use all extra money from commissions, bonuses, tax refunds, settlements, insurance payments, and other sources to pay down your student loan debt.
13. Loan. Consider applying for a FHA loan which requires a smaller down payment and less stringent mortgage approval requirements.

Why You Should Buy a Home

June is National Homeownership Month. Many Americans lost their homes during the recession and some have not fully recovered or do not desire to become homeowners again.  When owning a home you need to create a budget to help manage your finances and debt to make sure you can stay in your home for as long as you like and reduce the chances of filing for bankruptcy or foreclosure.  

Before you buy a home you need to prepare for the home buying process. Estimate your monthly mortgage payment. Subtract the difference of the estimated monthly mortgage payment and your current rent (if you pay rent).  The first month add $100 to a savings account.  The second month add $200 to the savings account, the third month add $300 and keep doing this until you save the entire amount of the difference from what you currently pay for rent and your estimated monthly mortgage payment. 

This will ease the burden of having to adjust to paying your first mortgage payment because you will have already budgeted your money to accommodate for the mortgage payment.   Your mortgage payment should be no more than 38% of your total monthly income.  This will ensure that you do not live above your means and hopefully have extra cash to pay for unexpected expenses and plan for retirement. The advantages of buying a home are:

1.      Build equity

2.      Generate wealth

3.      Access to equity for unexpected expenses

4.      Tax benefits

5.      Access to protection such as insurance and warranties

The disadvantages of buying a home are:

1.      Maintenance costs

2.      Increase in payments due to insurance or tax increases

3.      Insurance and tax payments

4.      Protection costs for insurance and warranties

Here are 9 tips to help prepare you for buying a home:

Step 1. Know Your Limit. The amount of home (sale prices) you can afford depends on your income, credit rating, current monthly expenses, down payment and the interest rate.  There are many options for owning a home such as:  buying a condo, townhome or single family home.

 

Step 2. Know your rights. There are several government acts that protect borrowers’ rights.  The Fair Housing Equal Opportunity for All act prohibits discrimination and intimidation of people in their homes, apartment buildings, condominiums and all housing transactions including rentals and sales. 

The Real Estate Settlement Procedures Act (RESPA) act relates to closing costs and settlement procedures. The act requires consumers receive disclosures during the home buying process and outlaws kickbacks.

 

Step 3: Shop for a loan. Save money by doing your homework. Talk to several lenders, compare costs and interest rates and negotiate to get the best deal possible. To show you are a serious buyer and to have a competitive edge over other buyers get pre-approved for a loan and use the pre-approval letter when shopping for a home.  Shop around with several lenders and get at least 4 quotes on loans to make sure you are getting the best price and terms. Contact a loan officer or mortgage lender instead of a broker to assist you with buying a home.  Ask for a list of current mortgage interest rates, if the rate is fixed or variable and the loan’s annual percentage rate (APR) which includes the interest rate as well as points on the mortgage loan and may include broker or lender fees. 

Step 4. Use programs. Several companies offer home buying programs such as Home Free and NACA as well as state governments to assist with down payment and closing costs.  Visit www.hud.gov/buying/localbuying.cfm to find home buying programs in your state. 

 

Step 5. Look for a home. Check the crime statistics, quality of schools, location of police and fire department, grocery stores and pharmacy when looking to purchase a home. Select a real estate agent and make a list of items and features you wish to have in the home.  Also ask if the home has lead paint.

 

Step 6. Make an offer. Work with your real estate agent to make an offer on the home you wish to buy. Make sure the real estate agent is working for you only and not working for you and the seller.  You need a real estate agent who has your best interest in mind.  

 

Step 7. Get a home inspection. Make your offer on the home you wish to buy dependent on a home inspection. Hire your own inspector who is unbiased and who will tell you the condition of the home (inside and out) and any potential problems that could happen in the near future.  Be sure to ask the inspector any questions that you may have or if you need further explanation.  Request a pest and lead inspection.

 

Step 8. Shop for homeowners insurance. All lenders require that you purchase homeowner’s insurance. Shop around to find the best deal possible.  Try to get a bundled package to include your car and home insurance to get discounts and ask what other discounts are available. 

 

Step 9. Settlement/Closing. Make sure you plan at least 2 hours in your schedule for the settlement.  Bring your Good Faith Estimate with you and compare fees – the fees will be different from the final paperwork but should not be too much more than the good faith estimate. Read all the settlement paperwork before signing it and don’t let the settlement attorney rush you. If there is a mistake on the form ask the settlement attorney to make the adjustment and give the forms back to you to sign during settlement.