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Corporate
Address:
226 Mohawk Drive
New Castle, PA 16105
800.525.7391
440.255.1199
Lic. #NMLS 244961
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Purchasing a Home
Are you ready to be a
homeowner?
If you're thinking
about buying a home, you probably have a mental list of the benefits owning a
home would bring to your life. You imagine waking up and falling asleep in your
own home, decorating as you please, or maybe even getting away from the loud
neighbor you hear every evening through the paper thin walls of your apartment
complex. You are ready to invest your monthly housing expense, instead of
giving it all to your landlord every month.
The desire to own a home
has been felt by nearly all Americans. Owning a home is the American dream. So
what's stopping you? That's a good question, one that should be carefully
answered. It's important that before you buy a home, you understand the
potential impact it will have on your finances and lifestyle.
Listed
below are some of the new responsibilities and added benefits of owning your
own home.
New Responsibilities:
Maintenance - If you've never
owned a home before, you are probably used to calling your landlord when an
appliance breaks down, or something else goes wrong. When you own your home,
you become the landlord. When the dishwasher stops working, you get to call the
repairman and pay for the repairs. Be prepared to spend more time and money on
emergency and planned repairs on your home.
Disposable Income - When
you buy a home, you can either pay cash or get a mortgage. Most people have
some kind of mortgage on the home they own. To get a mortgage, you will need a
down payment. Saving for a down payment will take discipline on your part, and
possibly some time. And this is required before you even move into the home!
Once you move in, you will need to continue setting aside money for repairs,
improvements, new appliances, etc.
Monthly Cost - In some cases, your
mortgage payment will be more than your current rental payment. This is
especially true if interest rates happen to be high when you purchase your
home, or if you buy a proportionately larger home than you are renting.
Mortgage payments are typically higher than rent because besides paying the
principal and interest on your mortgage, you must pay for hazard insurance,
property taxes, and any mortgage insurance that might be required.
Risk
- Any investment you make has some element of risk. Luckily, purchasing a home
is on the low end of the risk spectrum. Since no investment is totally safe,
you will want to do sufficient research before you buy the home, and continue
staying atop of current trends in your city and neighborhood to verify your
investment is doing well. Insurance and proper maintenance are other ways to
protect your investment.
Liquidity - Buying a home should be considered
a long-term investment. If you plan on moving frequently, you might not recoup
closing costs and fees paid when you get a mortgage, or the fees paid to a
Realtor when you sell the home. And unlike a mutual fund or stock, you must
sell your home to turn your equity into cash. Selling your home might take
months and relocating to a new residence takes energy. These are hindrances to
accessing the money you invested and why equity in a home is considered a
non-liquid asset.
Benefits:
Pride of Ownership - It is a
great feeling to own your own home. This benefit may be enough to outweigh any
disadvantage previously listed. With your own home, you feel a sense of
stability and community that you probably didn't feel when you rented. This
comes from the fact that you own a piece of property in a neighborhood along
with others enjoying the same benefits as you.
Investment - Since you
are going to have a housing expense for most of your life, it is definitely
worthwhile to consider investing some of that expense in a home of your own.
For those people who plan on staying in a home long enough to pay off their
mortgage, owning a home is a forced savings plan.
Appreciation - If
your house increases in value (becomes worth more than you paid for it) you
will benefit from this appreciation. As you continue to pay your mortgage, and
your home appreciates, your equity grows. When you sell your home, this equity
will become dollars in your bank account. It is important to carefully choose
your home so that over time you will benefit from appreciation, because it is
not necessarily guaranteed.
Tax Savings - Consult your tax advisor for
the specifics of any tax savings you might benefit from with owning you own
home. Usually, some expenses may be tax deductible such as mortgage interest
and property taxes.
If you are ready to take advantage of the benefits
of owning a home and feel you can handle the new responsibilities it will
bring, you will want to take the next step and determine if you are prepared to
qualify for a mortgage.
Are you qualified to buy a home?
To qualify for a mortgage, you will need to prove to a lender that
you have sufficient income, credit, and down payment for the home you are
trying to buy. In general terms, you can expect the following requirements by
the lender.
Income: One aspect of qualifying for a mortgage
is often referred to as your "ability to repay." This means that you
can provide evidence that you receive a certain amount of income
sufficient to pay your current liabilities along with the new
mortgage payment. Two qualifying ratios based on your gross monthly
income (income before taxes or deductions) determine the loan amount
for which you qualify. These ratios vary depending on your lender
and on each individual's situation.
You can call a mortgage
lender/broker and speak with a loan representative who can calculate these
ratios for you and provide a loan amount for which you qualify. The
lender/broker will require documentation of the monthly income you receive. If
you are a regular employee, 30 days of paystubs and W2s will be required. If
you are self-employed, two years' most recent tax returns along with a profit
and loss statement will be needed.
Credit:
Another aspect used
to determine if you qualify for a mortgage is referred to as your "willingness
to repay." This takes into consideration your past and present credit history.
Your credit history will demonstrate to a mortgage lender if you are willing to
pay your debts in a satisfactory manner. Your credit history includes items
that may or may not appear on your credit report. Liabilities like car loans,
credit card debts, and any personal loans will most likely appear on your
credit report.
If any of your liabilities at the time of applying to a
mortgage lender do not show up on your credit report, you will be required to
provide evidence of your repayment history with those accounts. An item that
most likely will not appear on your credit report is your rental history. This
will have to be verified independently either through a letter from your
landlord or copies of your rent checks that have cleared your bank account.
If you feel like you pay all of your creditors as agreed, you probably
have excellent credit. If your credit report confirms that you do pay on time
and in full, you should have no difficulty in obtaining a mortgage. Do keep in
mind that you never want to have too much outstanding debt so that you qualify
from an income position. If you do not have much of a credit history, for
whatever reason, you can still obtain a mortgage loan. For instance, when you
pay your monthly phone or public service bill(s), these companies do not report
your payments to a credit reporting agency. However, these are sources of
credit you may have obtained. Your lender/broker will need verification of
payments to these non-traditional credit references. Ask your lender/broker for
details regarding these types of credit references.
Some potential
homebuyers might have less than perfect credit histories. If you feel like you
fall into this category, discuss your particular situation with a
lender/broker. Many programs exist for different types of borrowers. Your dream
of homeownership might still be within reach.
Down Payment:
In the
past, if you did not have at least 20% of a home's purchase price as a down
payment, you could not qualify for a mortgage. Unfortunately, that kept many
people from buying a home. That is not the case today. As a result of
government programs, private lenders, and mortgage insurance you can buy a home
with as little as 3% down. And in some situations, mortgage companies are
beginning to offer programs requiring no money down.
Mortgage insurance
companies play a major role in helping a homeowner with less than 20% down
obtain a mortgage and purchase a home. Basically, a mortgage insurance company
insures the lender for the difference between what a borrower puts down (as
little as 3%) and the 20% down the lender would normally require as down
payment. Any mortgage amount you borrow that is more than 80% of the home's
purchase price will require mortgage insurance. With conventional financing,
you will pay the mortgage insurance with your monthly mortgage payment. FHA
requires a monthly mortgage insurance payment along with an up front insurance
premium that is financed in your loan amount. VA requires an up front premium
that can be financed into your loan amount.
Regarding your actual down
payment, however much it is, your lender/broker will have a few requirements.
The most common requirement is that the money you set aside for your down
payment can be verified as yours. Some mortgage programs may allow for your
down payment to come from other sources, however, it is more likely you will
have to prove that your funds for your down payment are your own. Another
requirement concerns the liquidity of your funds. A cash balance in your local
bank account is considered to be the most liquid. Stocks, bonds, or any other
assets (including property) are not considered liquid, but if sold and
documented to have been your own, are perfectly acceptable.
Homeownership is at an all time high because of low down payment
options. With a low down payment, many first-time homebuyers are now able to
experience the benefits of homeownership sooner than ever before.
Remember that the guidelines outlined above are general in nature and
your lender/broker can provide any specific requirements for your situation.
What's next? You've weighed the benefits versus the new responsibilities of
owning your own home, and you think you qualify for a mortgage.
So
what's next?
Find a Lender/Broker. The first thing you will want to do
is find a qualified mortgage lender/broker to verify that you do qualify for a
mortgage loan. This can be done before you even start shopping for a home and
most Realtors will recommend you get pre-approved for a mortgage also.
Find a Realtor. The second thing you should do is find a qualified
Realtor. Although you may think you can find a home by yourself, by looking in
the paper or driving through neighborhoods, a Realtor is an invaluable
assistant. Not only will he or she be able to direct you to your dream home, a
Realtor assists with the negotiating and entire home buying process. As a
buyer, a Realtor will provide most of these services to you free of charge. Be
sure to find out if the Realtor you choose will be working for you as a buyer's
agent, or for the seller as a seller's agent. It is usually desirable to find a
Realtor that will be your agent so that you will be satisfactorily represented
throughout the process.
Don't make any major changes. Do not make any
major financial changes in the weeks or months leading up to buying your home.
Any new debt could change the loan amount of the mortgage for which you
qualify. A change in jobs, especially from regular employee to self-employed,
could change the type of loan for which you qualify. Discuss any changes you
must make with your lender/broker first. He or she may be able to advise you on
the proper steps to take so that you can still become a homeowner.
Have
patience. Finding a home should not be taken lightly. You will want to take your
time and research the home you finally purchase. If you are living in a tight
home market, where there are more buyers than sellers, you may need to make
your offer on a particular home quickly, but that does not negate the fact that
you should do your research. Plan on treating your home search as a part-time
job. In the end, you will find that all of your hard work resulted in the
benefits of homeownership.
We hope these tips have been of
value to you. Please let us know if we can help you in any way!
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