Homeownership 101

So you’ve decided that you’re ready to purchase a home. Whether you are a first time home buyer or not, it’s natural to have a few reservations about the home buying process. Buying a home is likely the single largest purchase you will ever make. Our 10 step guide will help you navigate through the maze of purchasing a home.

The Top 10 Steps on home purchasing are:

1. Review your credit
2. Figure out what you can afford
3. Know your rights
4. Shop for a loan
5. Examine the different home buying programs
6. Shop for a home
7. Make an offer
8. Get a home inspection
9. Shop for homeowner’s insurance
10. Sign the papers to your new home.

Step one, review your credit. Well before you make the decision to purchase a home, you should obtain copies of your credit report from all three credit agencies. Once you have obtained those reports, address any deficiencies that may appear there.

Step two, determine how much home you can afford. What you can afford depends on your income, your credit rating, your current monthly expenses, the amount of down payment you have and the current interest rate. A good rule of thumb is that you can afford a home that costs about two and a half times your annual salary.

Step three, what are your rights? There are several federal agencies that govern consumers’ rights regarding home purchasing. First, there is that Fair Housing Act which prohibits discrimination in the sale rental and financing of dwellings and in other housing related transactions based on race, color, national origin, religion, sex or family status. The real estate settlement procedures act, also known as RESPA requires that consumers receive a disclosures at various times in the transactions.

Additionally, there are several borrower rights you have. You have the right to shop for the best loan and compare the charges of different mortgage brokers and lenders:

• You have a right to be informed about the total cost of your loan, including the interest rate points and any other fees.
• You have the right to ask for a good faith estimate of all loan and settlement charges before you agree to the loan, you have the right to know which fees are not refundable in case you decide to cancel the loan agreement.
• You also have the right to ask your mortgage broker to explain exactly what the broker will do for you.
• Additionally, you have the right to know how much the mortgage broker is being paid by you and the lender for your loan.
• If your loan application is denied, you have a right to know the reason why.

Step four, shop for a loan. Talk to several lenders. Compare costs and interest rates. Make sure that you are prequalified and preapproved for a loan. You supply a bank or a lender with your overall financial picture including your debt, income and assets, and they give you an estimate of how much you can borrow. This can be done over the phone or online and there is usually no costs involved.

Getting pre-approved is the next step. It is much more involved. You must complete an official mortgage application and supply the lender with the necessary documentation to perform an extensive check on your financial background and current credit rating. Some lenders charge an application fee for pre-approval, which typically runs between $300 and $500. After reviewing your finances, the lender can pre-approve you for a mortgage up to a specified amount. They will also provide you with the letter which shows that you are a serious buyer.

Step five, research various home buying programs. Each state, provides resources to help you navigate the home purchase process. These programs are sponsored by your state or local government or other organizations. HUD prepares a comprehensive resource for identifying housing programs state by state.

Step six, begin the process of shopping for a home. It’s usually beneficial to hire a real estate agent or realtor to help you. The agent will assist you in finding and choosing a home. They will also ensure that the home inspection is thorough. You should also be able to rely on your agent to guide you through the closing process.

Step seven, you found a home and you’re ready to make an offer. At this point, you should continue to work closely with a realtor to determine the market. In determining the market, you will find out how much the seller paid for their home when they purchased it. determine the seller’s mortgage balance and examine comparable sales in that neighborhood. The realtor will provide information on the square foot cost averages to determine whether or not on offer is too much or too little for the house in question.

Step eight, get a home inspection. Although lenders require a home appraisal, the inspection is for the bank to determine whether the house is worth the price you’ve agreed to pay. For the home inspection, the buyer has the responsibility to hire an engineer to conduct a home survey and determine the structural integrity of the property. The engineer will be able to identify potential problems that could require costly repairs down the road. If the home inspection reveals potential problems, then you the buyer, have a right to negotiate that price downward based on any defects or flaws that are found in the home. Or, you can simply request that the problems be fixed prior to closing.

Step nine, get homeowner’s insurance. When it comes to homeowner’s insurance, most people immediately think of protection in case a fire destroys their home, but there is so much more to homeowners insurance policies. A complete package policy includes coverage for damages to your home, it also covers liability for any injuries or property damage that happens to others while on your property. This would also include your pet if your pet happens to bite a neighbor. It covers damages from a fire, tornado and most other natural disasters. However, natural disaster exceptions are floods, hurricanes, and earthquakes. In these instances, you need to purchase special coverage to address those occurrences. Coverage for normal wear and tear is also excluded from insurance policies.

Finally, step 10 sign the papers. There are several documents that must be signed at the time of closing. In fact, the signing process sometimes feels as if it takes longer than finding a home. However, these papers are very important and they form an integral part of the closing process. The first one is the real estate settlement procedures act or RESPA, which we have spoken about earlier. It acknowledges that you have been informed about how the closing process works and that you fully understand all of the closing documents and financial obligations related to your mortgage. The Truth-in-Lending Disclosure Statement is a final statement that requires lenders to disclose all of the actual terms and conditions of the loan. The HUD 1 Form or the Settlement Statement is developed by HUD to comply with the RESPA Act. It itemizes each payment made by the respective parties to the transaction. The Mortgage Note is the buyer’s commitment to repay the mortgage. It stipulates the terms of the loan including the loan amount, the interest rate, the address the buyer is to send payments to the maturity date of the mortgage, frequency of payments and date changes if the mortgage happens to be an adjustable rate. The security interest is also known as the mortgage or deed of trust. It is a pledge of the property as security for the loan. It stipulates the same basic debt information that is found in the note and is recorded in the parish or county where the property is located. The Warranty Deed is the legal document that transfers the title from the seller to the buyer. It identifies the name of the seller as the guarantor in the name of the buyer as the guarantee.

Depending on where you live, there are many other documents that may be a part of the closing package. Make sure that you work closely with your real estate agent to identify all of these documents and make sure that everything has been completed thoroughly. If at any point during the closing process, you find that you do not understand terms or you find terms to which you do not agree, do not hesitate to speak out. This is the time to ask questions. You have a right to know what you are signing before you close on your home. This concludes home ownership 101. Make sure you tune in to the other classrooms on our module.