For most Americans, the single largest expenditure they will ever make is the purchase of a house. As a result, the process can be fraught with confusion and anxiety. The house you live in and raise your family in, though, is your home, and probably will be for many years to come. With simple planning and some due diligence, you can make a rewarding decision that is right for your family.
According to the U.S. Census Bureau, “home equity … constituted the largest share of household net worth, accounting for 32.3 percent of total net worth in 2000.” With home equity defining the net worth for most Americans, home ownership is an important step to economic prosperity. The U.S. Department of Housing and Urban Development offers nine steps to buying a home.
- Step one: Figure out how much you can afford.
Many rely on a mortgage broker or banker to tell them how much they can afford based on credit scores, annual income and debt-to-income ratio. But these numbers may not tell the whole story.
For example, conventional mortgages limit your housing costs (mortgage, taxes and insurance) to 28 percent of gross (pre-tax) income. Your total debt payments — including mortgage, credit cards, student loans and car payments — cannot exceed 36 percent of gross income.
And you may not have considered the increased costs that go with home ownership. When you rent, your landlord generally takes on the responsibility of maintenance and repairs. As a homeowner, that cost falls to you.
Millions of Americans deal with malfunctioning appliances and home repairs every day, so this shouldn’t keep you from buying a house, but it is best to factor in such potential costs when considering how much home you can afford. If the house you’re thinking of buying has new appliances and plumbing, you may need to set aside less money for repairs initially than a person buying a house with older appliances. Regardless of the age of the house or appliances, though, part of your monthly budget — just like gas, electricity and water — should be home repairs.
Repairs aren’t the only costs to consider. If you want a bigger house, you will need to budget more for utilities. If you want a large yard, it will cost more to water it.
You also shouldn’t neglect other important financial goals when you buy a house. Continue to contribute through an employer 403(b) or 401(k) plan, IRA and possibly a college savings plan. Owning a home is important, but it shouldn’t derail other financial goals.
- Step two: Know your rights.
As you look for a new home, you may find there are less than reputable people and institutions willing to assist you, or you may discover certain housing options are not made available to you.
Most of us will buy our first home using a mortgage. Under the Real Estate Settlement Procedures Act (RESPA), certain disclosures are required during the transaction. You can find more information about RESPA on HUD’s Web site. The federal Fair Housing Act spells out housing rights. According to HUD, “[l]andlords who refuse to rent or sell homes to people based on race, color, national origin, religion, sex, familial status, or disability are violating federal law.”
- Step three: Shop for a loan.
15-year fixed. 30-year fixed. Adjustable rate mortgage (ARM). Interest only. The list seems confusing, and lenders offer new options every day. Last year, 50-year mortgages became available in some parts of the United States.
The best mortgage choice depends on your financial situation, but many financial planners generally recommend a 15- or 30-year fixed rate mortgage.
With this type of mortgage, your interest rate — which right now is off its historic lows, but still quite competitive — is fixed for the duration of your loan. That means you don’t need to worry about interest rates hikes. Your rate is set.
An adjustable rate mortgage is frequently sold as a smart idea if you plan on living in the house for a short time. The danger is if you live there longer than you anticipated, interest rates may skyrocket. While predicting interest rates is almost as hard as predicting the weather, many prognosticators feel interest rates will rise in the coming years, making an ARM more expensive.
- Step four: Learn about homebuying programs.
Whether it’s the “Good Neighbor Next Door” program (formerly known as the Teacher/Officer/Firefighter Next Door program) or an FHA or VA loan, there are many programs worth considering when purchasing a new home. Visit HUD’s Web site, or talk with a Realtor or mortgage broker about programs you may qualify for. Many help with down payment assistance, reduced mortgage rates or reduced closing costs.
- Step five: Shop for a home.
This can be the most exciting (or most stressful) part of the whole process. A real estate agent or Realtor can help significantly. Ask friends, family and neighbors for recommendations to a helpful agent.
Consider first what you want in a house. How many bedrooms or bathrooms do you want or need? Do you want a “fixer-upper” or do you want something that you can move into immediately? Knowing what you want or need will help you and your real estate agent narrow down available choices.
What if you don’t want to use a real estate agent’s services? While their fees are generally paid for by the seller, you may get a price break by not using one or buying a “for sale by owner” house. Numerous Web sites can help you research homes for sale in your area. Don’t forget your local newspaper.
- Step six: Make an offer.
Based on the selling price of similar homes in your area, you’ll want to make an offer. Generally, if you’re using a real estate agent, he or she will run “comps,” or comparisons with similar homes in the same ZIP code or city. There you’ll be able to find a cost per square foot and then make an offer. This process sometimes takes a little back-and-forth, so be prepared to negotiate.
In the offer, you’ll also discuss the terms of the deal, including when you will close on the house or take possession. Generally, most people make the offer contingent on a satisfactory home inspection, the sale of their current home and financing. If any one of those three things falls through, you can generally back out of the deal with minimal loss.
- Step seven: Get a home inspection.
HUD recommends that you make your offer contingent on a home inspection. A professional home inspector will check for any needed repairs in the home and make recommendations. In some cases, a house may fail inspection for certain types of loans, but in most cases, the necessary repairs are minor and can be negotiated between the buyer and seller.
- Step eight: Shop for homeowner’s insurance.
You won’t be able to get specifics about homeowner’s insurance until you have a specific home in mind, but you will need to consider its costs in step one, determining how much you can afford. Ask around, and call your insurance agent to help you determine a ballpark figure you can work with. It is frequently possible to get discounts if you have homeowner’s insurance and car insurance through the same carrier.
In light of recent hurricane damage, flood insurance is a subject of interest to many in Alabama, Mississippi and Louisiana. Even those who don’t live along the coast should consider the damage a flood can cause.
Check to see if your home is in a flood-prone area. While you may live where the storm surge of a hurricane is not a concern, springtime thunderstorms, swollen creeks or poor drainage could cause flood damage to your home, and regular homeowner’s coverage does not cover flooding.
- Step nine: Sign the papers.
Be sure you understand all the paperwork you’re asked to sign. Most of the documents will be standard disclosures you can review in advance, while some you won’t see until that day. When your title company makes the appointment to sign your paperwork, ask that they schedule enough time for you to read through each document. Generally, you’ll have an hour to 90 minutes scheduled, which is sufficient.
HUD’s list stops at step nine, but as you prepare to move in to your home you’ll find additional considerations, including:
- Turning on electricity, natural gas and water, or transferring service to your name and account. You may also need to have propane or septic service started or transferred.
- Hiring movers.
- Buying appliances. If you’ve always rented, you may not own a refrigerator, washer or dryer.
- Getting to know your neighbors. Community is hard to find, so be intentional about it. Learn about community events and participate. If you’re buying a house in your current city, take the opportunity to invite your new neighbors to church. If you’re in a new city, get to know other Christians in your neighborhood and find a good church to worship in on Sunday. And don’t forget, God has led you to your new home. Look for opportunities to share the message of salvation through Christ with your new neighbors in your Jerusalem.
EDITOR’S NOTE — Mike Ford is a senior relationship manager with GuideStone Financial Resources of the Southern Baptist Convention.
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