Purchasing a Home
Congratulations. You’ve thought about purchasing a home, and you’re ready to join the tens of millions of other Americans who have bought their own homes and are enjoying the benefits of home ownership. Like any new venture, you are probably a little bit nervous as you start to research buying a home, so this website is designed to give you some general ideas on how to go about the process, and to make you a more knowledgeable buyer. What follows should give you enough information so that with your Realtor and lender you can make informed decisions about buying your home. The result will be perhaps the most rewarding thing you can do – owning your own home.
Things to Consider When You Purchase a Home
There are basically four main things to consider when purchasing a home: Selecting the home that is right for you, financing the home purchase, choosing a Realtor and making the offer.
Selecting the Right Home
Of all the issues involved in purchasing a home, this is probably the most subjective. Ask yourself, what type of home satisfies your needs? Is it a single family, detached home with a backyard, or a condominium? Do you want your home on one story or multiple stories? Is it close to schools, shopping and work?
Financing the Home Purchase
Perhaps the most important consideration when buying a home is how to finance the purchase. Buying a home can involve the commitment of a significant amount of your savings. Questions such as how much can I borrow and how much can I afford to pay on a monthly basis are very important as the decisions that are made here can significantly impact your financial situation for years to come.
Let’s start by addressing the issue of the down payment. Lenders have many loans available for home purchases, There is no hard and fast rule on how much to commit to a down payment, but try and anticipate your cash needs as best as you can before determining how much to commit to a down payment. Generally, the less of a down payment you have, the greater the loan you are going to need to close the purchase. The greater the loan you need means your monthly payment will be greater, which means the income you need to qualify for the loan will need to be greater too.
The next important issue is the loan itself. What follows is a very brief discussion of a highly complex subject. The number and types of loans available for home purchase are about as numerous as the number of lenders making loans, so this discussion is designed to give you only a broad brushstroke view of the lending market. Lenders generally make two types of loans available for home purchases, a Variable Interest Rate Loan (sometimes known as an Adjustable Rate Mortgage) and a fixed rate loan. Within those two types of loans, the loans can either be “Conforming”, which means the loan amount is within the Fannie Mae/Freddie Mac loan limits (check with a lender in your State for the current loan limits), or it is “Non-conforming”, which means the loan amount is in excess of Fannie Mae/Freddie Mac loan limits.
Variable Interest Rate Loans generally have a lower interest rate at loan origination, but have the provision for the lender to increase or decrease the interest rate on the loan based upon the movement of whatever index the loan is tied to. Because the interest rate can be adjusted, the lender has the right to increase or decrease your monthly payment accordingly. When and by how much the payment can be changed depends upon the loan terms you agreed to. The one thing you need to be watchful for is that many times a lender will qualify you for your loan at what is called a “teaser rate”. While teaser rates are designed to help you obtain a loan, this is generally accomplished by starting your loan at an artificially low rate. After a specified period of time has elapsed, perhaps three to six months, the interest rate on the loan is then increased to bring it in line with where the true interest rate should be. This can result in a significant increase in the amount of the monthly payment. While Variable Interest Rate Loans have become popular over the past fifteen to twenty years, if you are not comfortable with the idea that your payment can be increased or decreased by your lender, then the more traditional fixed rate loan is probably for you.
Fixed Rate Loans are still the most popular form of financing. With this type of loan, your payment will remain constant for the entire term of the loan. These loans generally have a slightly higher interest rate than the Variable Interest Rate Loans at origination, but unlike the Variable Interest Rate Loans, the interest rate will remain fixed throughout the term of the loan. The traditional fixed rate loan generally fully amortizes over a thirty-year period, with the payment in the first month the same as it is in the 360th month. For those buyers who want to know that their monthly commitment to a home payment will always be the same, this is the loan for you.
Also remember that whatever loan you obtain, the lender may require an impound for real property taxes and insurance, which will further increase the monthly payment. These impounds are designed to make sure that the borrower has enough funds available to pay for property taxes and insurance when they become due and payable.
How much home can you afford to purchase? This is a difficult question to answer, as each potential buyer’s situation is different. The very best way to answer this question is to go and talk to lenders and ask them to calculate how much they can qualify you for based upon your income, length of time on your job, and amount of your down payment. Lenders will need to know how much debt you have, such as car loans, credit cards, student loans, etc. Remember, once you actually apply for a loan, all the information you use to qualify for the loan will be verified through the loan qualification process. Another suggestion would be to talk to more than one lender. Each lender may have a slightly different loan to offer. Find out which lenders are most active in the real estate market in your area.
Selecting a Realtor and Making the Offer
Your Realtor is trained in the process of making the home buying process easier for you. They can offer help in locating properties that are available for sale, give recommendations on financing, help you to understand the local real estate market, and help advise you in preparing an offer and negotiate the sale. Negotiating a purchase can be very complex, as often it takes multiple offers and counteroffers before a contract is finalized. Realtors can make sure that the offer you make is in line with the value of homes in the area you are trying to buy into. They are also experts on what disclosures are required in a sale, and what inspections need to be done. A good Realtor will be with you every step of the way, from escrow opening until you finally close your home purchase. You should view your Realtor as an expert who is there to help you in each step of the transaction.