Purchasing a Home

Get Pre-Qualified

Do you know if you can afford a home? How much can you afford to spend? These are a few questions you should get answers to before you start to look for a home.

Talk to your lender first. Go over all of your finances with the lender and they can pre-qualify you to borrow a certain amount of money. The pre-qualification does not commit you to a loan but it does show that you have qualified for a loan based on preliminary questions asked by your lender. The pre-approval process is more involved because your lender will pull your credit reports, check debt-to-income ratios and perform other underwriting steps. This puts a borrower much closer to obtaining a loan and establishing a rate and term. Be honest with your lender and your financing experience will be concise and pleasant. The pre-approval amount will help you focus your search within a certain price range. Do not waste your time looking for properties that exceed your pre-approval amount because the lender will not loan you more money than you qualified for.

Real Estate Agencies

Real estate agencies can be a tremendous help to you when you decide to purchase a home or property. Use a reputable real estate agency in the area you are searching to help you find properties within your budget. Real estate agencies have access to the MLS (multiple listing service), which is basically a computer database of all homes listed in a geographical area categorized by price, square footage, number of bedrooms, etc. These listings will also display current costs, for example taxes, electricity, water and any other expenses that could be useful in helping you decide if this property meets your budget. Agencies are paid a fee by the seller to list and market their properties, screen potential buyers, and present offers to the seller for review.

Purchase and Sales Agreement

Once you have found the home that you are interested in purchasing, you must sign a purchase and sales agreement. This is a legal and binding document that identifies the buyer and seller, the property to be purchased, the price, and any contingencies that will be part of this purchase. Contingencies are conditions that must be met in order for this transaction to take place and must be fulfilled by both parties. Once this document is accepted and signed by both parties the contract is enforceable. Make sure you understand the contents of this document because failure by the buyer or seller to fulfill the contract could lead to legal ramifications and potential loss of one's deposit.

Home Buyers Loan Application Checklist

Following is a list of documents you will need to bring your lender for your loan to be processed. Some lenders will require more information or charge different fees than others.

1. A purchase agreement signed by the sellers and buyers.
2. Picture IDs.
3. Legal description of the property.
4. Personal check for the application fee (varies by lender).
5. Copy of one month's recent pay stubs.
6. Copy of last 2 years' W-2 forms (Some cases, entire Tax Returns for 2 years).
7. Last 3 months’ bank statements (checking and savings).
8. Proof of where you are getting down payment funds.
9. Name, address, and account number of current mortgage company. If you rent, 12 months of receipts or cancelled checks.
10. Creditors' names, addresses and account numbers, plus balances and monthly payments.
11. If applicable, copy of divorce decree or proof of alimony or child support.

How Much Do I Need?

You will need money for the following:

1. Down Payment - A down payment is a percentage usually from 3-20% of the property value. If you put down less than 20% you may be required to have PMI (Private Mortgage Insurance).

2. Closing Costs - These costs include mortgage points, taxes, title insurance, documentation stamps, finance costs, items that may be prepaid or escrowed, and other settlement costs. Your lender will give you an estimate as to the total amount of the costs associated with the purchase of the property after you apply for the mortgage.

Down Payments

Down payments are monies (usually 3-20% of the total selling price of the home) that the buyer must pay up front. You will need to bring these funds in a certified check the day of the closing. These funds cannot be borrowed and can come from your savings, IRA securities, cashed-in stocks, etc. If you are given a gift from family, you must be able to prove this money was a gift and not a loan to be repaid.

Closing Costs

Once you have found a property that you qualify for, talk to your lender and shop the different mortgage plans available. Make note of all costs pertaining to each plan. Add these costs to your initial down payment amount to estimate your total cost necessary to purchase the home.

Can I Afford the House?

Even though you can afford to pay the mortgage, you must be aware of your housing costs. Real estate taxes, insurance, water and sewer, electricity, cable, homeowner/condo fees, estimated repairs (see appraisal inspection), maintenance (pool/lawn care), etc. are just some of the costs you will incur in homeownership. Maybe the house will need a new roof in two years or a hot water heater. Although these costs can be large and overwhelming, do not let them intimidate you. If you are aware that you may be incurring these expenses in the future, plan for them, break them down on a monthly basis and go through your budget to see if you can accommodate them without severely disrupting your needs and lifestyle. If these monthly expenses are overwhelming and exceed your budget, you may choose to purchase a smaller home or a condo. The difference in a lower purchase price could offset all of these costs and make a purchase more appealing. Do not overburden your earning ability or the ability to pay your bills.

Appraisals/Inspection

Your lender will require an appraisal of the value of the property you want to purchase. The property appraisal is performed by a licensed professional who will assign a dollar value to the property, usually by researching the neighborhood and comparing the value of homes in the area that have recently sold. The appraisal amount must be able to justify the selling price of the home. A lender will not lend more than the value of the home you are trying to purchase. It is also important to have an inspection done on the home to get an understanding of its condition and integrity. Inspections are performed by licensed individuals and usually are not required by the lender. Inspections can range from $100 - $500, depending on the size and extent of the inspection, and worth every penny. Home repairs today are expensive and it is worth your piece of mind to know what you are buying and the condition it is in. Listen to the inspector and find out costs for any repairs you may have to make if you purchase the home. Alert the seller to these problems and they may reduce the price of the home to pay for these costs. Remember once you buy the house the problems and the costs that go with them are yours!

Insurance

Homeowners insurance is required if you are using a lender to purchase a home. Condominium buyers are required to have condo insurance on their unit. If you are planning on purchasing a home in a flood zone, you will be required to purchase flood insurance, which is underwritten by the Federal Government. Recently, insurance companies have been raising rates and declining coverage in certain areas of the country. Because of these potential premium increases, it is important that you recognize the costs involved and plan for such increases in your monthly budget. Solicit quotes from three different insurance agencies and choose one that will best accommodate your needs.

Property Values Can Appreciate/Depreciate

Values of homes can change anytime for many reasons. During the late 1980's, the economy was weak, unemployment went up, and home values in the northeast and west coast dropped up to 40%. It took close to 10 years to regain these losses. Many people lost their jobs, lost their homes to foreclosure because they had committed to large mortgages, and were not able to pay back their loans. If your home depreciates (loses value from its purchase price), then you are paying for a house that is worth less than the initial price you paid for it.

If your home appreciates in value (increases value from its purchase price), then you are earning a gain, or equity, in the value of your property. It is important to evaluate the home you are buying, its location, condition and surrounding areas, as well as the state of the economy at the time of your purchase. If you are working for a company that is struggling to keep its workforce busy, you may want to delay purchasing a home until you can get some assurance that things will improve.

If you purchase a home and cannot make the monthly payments, the house will be repossessed and sold at auction. You will lose all of the money that you put into it. Remember, when you purchase a home you are committing yourself to a large financial commitment (15-30 years) and it is up to you to maintain your mortgage payments and the condition of the home to protect your investment.

The subject matter contained in our educational publications is for informational purposes only. We suggest that you consult your financial or other advisors when planning for your specific needs or requirements.

This article provided by Debt Management Credit Counseling Corp. and is used by permission. For more information go to http://www.lifeway.com/debt.

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Purchasing a Home