Learn how you can make your home purchase a more successful and enjoyable experience…
As the 2017 home buying season kicks in, TheWealthIncreaser.com thought that a helpful page to help those who are entering into the home buying arena for the first time was an appropriate topic of discussion that could help many aspiring homeowners make good decisions in the home buying process that could put the power of a home purchase in their hands—and not in the hands of creditors and others who have no real concern for their and their family’s future.
Where do I start in the home buying process?
As a potential homeowner your first step is to look within and determine if purchasing a home will serve your best interest on a number of fronts.
Do you know and understand your responsibilities as far as owning a home is concerned?
Are you ready to pay homeowner’s association fees, homeowners insurance, taxes, lawn maintenance, home upkeep and confront all of the potential emergency situations that may arise during your period of homeownership?
The above as well as other questions must be answered satisfactorily by you!
You can more readily determine your readiness for “your” home purchase from a mental and financial perspective by doing a pre and post home purchase analysis at this time to determine if you have the financial strength on a monthly and annual basis for homeownership that puts you in control—and keeps you in control!
You must know what to expect upfront in the home buying process…
You must know that there are a number of loan options available and you must know your housing ratio and your housing versus debt ratio on the front end to help you readily determine if you are financially capable of handling the home purchase and other debt that you will carry on a monthly basis.
You must know the importance of creating a properly funded emergency fund now or soon after your home purchase and you must know and understand fully why doing so protects you and your family from future financial risks—therefore helping to ensure that you significantly increase the odds that you can maintain and keep your home.
Types of Loans Available
It is important that you realize that home loans generally fall into two categories—Government Backed and Conventional.
Government backed include FHA (3.5% down payment required by you or gift of same amount from someone else), VA (0% down payment but funding fee requirement that can be financed into the loan) and USDA (loan for rural areas in the United States). Government backed FHA loans will generally have a MIP or mortgage insurance premium added to the monthly payment if you put less than a 20% down payment.
Conventional are issued by non-governmental companies (private loan companies, credit unions and large banks) and they come in many forms such as ARM or adjustable rate mortgage, fixed rate and many other creative options that are available depending on the company offering the loan. Conventional loans will generally have a PMI or private mortgage insurance premium added to the monthly payment if you put less than a 20% down payment.
You must have working knowledge of the Home Buying Process…
You must know that you will have to bring an Earnest Money Deposit at the time of your offer contract to show your seriousness of intent to purchase your home (process varies from state to state so check with your agent) and it will be credited at closing toward your closing costs and/or purchase price if you ultimately purchase the property. Always realize that closing costs and other special stipulations in your offer contract are negotiable between you and the seller, therefore you want to choose a competent real estate agent to represent your and your family’s financial interests.
You will also have to perform a home inspection (generally costs several hundred dollars or more and includes HVAC, Plumbing, Roof, Water Heater and Structural Areas etc.), a termite inspection, a radon inspection, a lead-based paint inspection (for homes built prior to 1978) and possibly other inspections depending on the community in which you purchase your first home.
If the home that you are considering for purchase needs renovation–you may be able to use an FHA 203K Renovation Loan or a Fannie Mae Renovation Loan to make your purchase and repairs more manageable!
In addition be sure to budget for appliance repair and/or replacement and consider a home warranty.
Be sure that you are aware of environmental concerns in the area that you are considering for your home purchase. You may also need to do additional inspections at additional cost such as pool system, or other inspections based on the features of the home and property.
In addition, your property must appraise for the purchase price, otherwise you may have to bring additional cash to closing or re-negotiate the terms of settlement.
Your lender will also require that Title Insurance is purchased for their protection and you want to be sure to purchase a policy for yourself and your family’s protection as well. By doing so you reduce your risk of losing the property due to issues in the “chain of title” up to policy limits on the contract. You also want to properly title your property with the right deed type—based on what is best for your and your family’s future goals.
Depending on your state, the above fees and possibly other fees—will be paid at closing or paid outside of closing (POC) and you must budget for them or negotiate them appropriately on your home purchase contract.
In addition be sure to seriously consider getting a one year home warranty that covers many of the items mentioned above. You can start by trying to negotiate for the seller or your real estate agent to pay for the one year home warranty coverage. If unsuccessful with those options consider purchasing a one year home warranty policy yourself to protect yourself and your family for the first year of ownership.
In addition, if major systems such as HVAC, Water Heater, Appliances etcetera are more than 10 years old consider having them replaced or at least properly serviced prior to closing–and doing one and/or both can be negotiated in the contract (purchase price might increase but you would have more peace of mind by having a new system or possibly know the remaining life if the system has been recently serviced).
Lease Purchase Option
With many consumers suffering from poor credit as a result of the massive financial downturn in 2008 and subsequent years many consumers are now pursuing other creative options to purchase their first home or rebound after the loss of a home they once owned or had a mortgage loan on.
A lease option or rent to own allows someone with poor credit the option to purchase a home in the future (usually 12 to 24 months into the future) at an agreed upon price.
The 12 to 24 month period is usually allowed to give the purchaser time to improve their credit so they can get a loan—or get a loan at a better rate. In many instances the property can be titled and deeded in the name of the person(s) who is leasing to own and the purchaser (and all parties involved) signs off at closing that they have the option to purchase if done so within the period outlined in the closing documents at an agreed upon price. If you exercise the lease purchase option in the future the property will then be fully titled and transferred in your name(s).
In addition, a lease option can take on many other forms and variations. It is you (the person who enters into a lease purchase option) who must weigh the pros and cons if you sincerely pursue this homeownership option.
Although TheWealthIncreaser.com believes that an intelligent, consistent and proactive approach in which you get your credit and finances in order on the front end is more appropriate, a lease with option to purchase may be appropriate for some. Be sure to make it a win-win situation for all parties involved or at the very least—a winning situation for you and your family by doing your due diligence about lease purchases on the front end.
Your successful home purchase begins with you determining that the home purchase that you are considering is really what you want, knowing the costs associated with your home purchase and home ownership (maintenance), knowing that you purchased in a stable and appreciating (although no way to know for certain due to forces outside of your control) area, knowing that the amenities that you desire are in close proximity, knowing about environmental concerns near and around the home that you are considering for purchase—and any other factor(s) that may be of concern for you and your family.
Also realize that a cash purchase and other creative ways to purchase your home is always an option. What has been presented in this discussion is the “most common and effective ways” that you can purchase your home that allows you to use the tax code and a low down-payment to possibly build wealth.
Those (Mortgage Lenders) who originate, process and underwrite your loan for your home purchase mainly want to see that you are willing to pay based on your credit profile—and you have the ability to pay based on your current income!
By knowing your monthly income and housing ratios as it relates to your home purchase and having a working knowledge of your credit and credit score you will put yourself well ahead of most 1st time home buyers—or any home buyer.
By knowing that you will have to put up earnest money, come up with a down payment and pay costs both inside and outside of closing (i.e. home inspection, insurance, have 3 to 4 months of escrow or your monthly housing payment in your bank account at or after closing etc.) you set your mind up for what is expected and you help reduce your stress levels now and in your future—significantly.
The closing process time frame involving lenders from the time of your application to closing is normally 30 days (short end of spectrum) up to 60 days (long end of spectrum) and will vary based on the lender and the type of loan that you select.
You will also have a 3 Day Review Period after you see your settlement or closing cost totals and you can use that period to challenge what you don’t like and/or get additional clarification.
You can also use a proactive approach to compare loans when loan shopping as well. In addition, you must realize that a home loan pre-approval gives you more negotiating power than a home loan pre-qualification in most cases.
Also be aware of your due diligence period and any special stipulations in the contract. Once the contract is accepted and you meet the lending criteria and inspection contingency there may be no turning back. Always have an approach to learning that gives you the clarity that you need to succeed prior to engagement–thereby turning the tide on who is most prepared! Be sure to use the glossary of finance and real estate terms to enhance your understanding of this page, real estate and personal finance in general.
It is imperative that you fully understand–or overstand (this cannot be misunderstood by you) upfront that if you see the house that you want and you are eligible for financing and the inspection contingency is met along with all of the other stipulations that are spelled out–closing must proceed–otherwise there will be major consequences as a result of not closing for any reason that is not explicitly spelled out in the contract.
Down Payment, closing costs, taxes, insurance and other settlement related fees can push closing and other related costs in the 3% to 5% range (or possibly higher) of the purchase price depending on your state and local jurisdiction, how you (or your agent) negotiate closing costs and the type of loan that you choose.
Always remember that even though closing costs are negotiable you as the purchaser want to be in the driver’s seat–meaning you want to make the first gesture at the time of the offer contract as to what percentage you are willing to pay.
Also realize that many lenders use a 12 month bank statement for VOR or Verification of Rent in the underwriting process instead of relying on a statement from your leasing office stating that you have paid your lease in a timely manner during your lease period. You can thank the financial turmoil of the past decade for this and other home loan tightening guidelines as it relates to your home purchase.
After your loan is underwritten and closing occurs your lender will wire the funds at closing to the seller and/or attorney depending on your state (and/or mortgage company if an outstanding loan exists) and you will be expected to bring the down payment amount along with settlement fees (bank certified check or what form of payment is customary in your state) that you agreed to (minus your earnest money deposit that you put up in the offer contract) to the closing–plus a small cushion that will generally be refunded to you in most states.
If all of the above goes smoothly—the keys to entry, closing documents along with your new home will be your responsibility and you will be in position to enjoy your new home. Your home purchase will be recorded at the local, county and/or state level depending on your jurisdiction letting the world know that you are on your way toward true ownership (ownership without owing anyone) with each payment that you make!
All the best to your home purchase success…