Homeownership: Are You Ready?
By Kristi Vaughan
For many, homeownership is the great American dream. Are you ready to take the plunge?
Owning a home is serious business. In fact, it will probably be the largest investment you'll ever make. So before you make the transition from renter to homeowner, invest some time in understanding the process and thinking about what it will mean to you, your budget and your lifestyle.
Differences between renting and owning
As a renter, your biggest obligation is to make sure you pay the landlord on a regular basis and that you keep up with the payments for your phone and other utilities. But if the roof needs patching or a pipe springs a leak, fixing them probably is not your worry. Neither is paying property taxes, painting the window trim or replacing the furnace.
Flip sides to that of homeowner. When the furnace stops working one cold January day, who are you going to call? And what happens when the month is longer than your paycheck? Can you sacrifice the "want" of a weekend away for the "need" of paying your mortgage?
Of course owning a home isn't just about obligation, debt and repairs. Homeownership can be a source of pride and a way to grab a solid footing in a community. It's a place to call your own and a place for your kids to come back to. It's also the best financial investment you can ever make, since in the long term, real estate always increases in value.
Government encourages homeownership
Through numerous programs and tax laws, the federal government encourages homeownership in the United States.
The federal department of Housing and Urban Development offers mortgage programs to help buyers of many income levels. And first-time homebuyer programs and housing counseling sessions are available to help you understand the full picture of homeownership.
Tax deductions given to homeowners holding mortgages and paying property taxes are high on the list of incentives used to encourage homeownership. Homeowners who itemize deductions on their federal tax returns can include among their deductions the cost of mortgage interest and property taxes. So too can certain other expenses be deducted, including the "points" paid when you take out your mortgage and, in some cases, the interest paid on home equity loans.
First steps
If you've now decided that homeownership is for you, it's time to take the steps that will lead you from renter to homeowner.
Determine how much house you can afford.
There are two factors at work here: the amount of money you have available for a monthly mortgage and the amount of money you have available for other housing expenses, including taxes, utilities, maintenance and saving for potential repairs. With the exception of low down payment programs, banks generally figure homebuyers will pay at least 10 percent of the house price as a down payment and finance the rest. For the amount financed, banks like to see total monthly housing costs, including mortgage, taxes and insurance, no greater than 28 percent of gross monthly income. When the costs of other long-term debt including car payments, student loans, etc. is added in, banks like to see a figure no greater than 36 percent of gross monthly income.
Interest rates and the length of time you borrow the money will determine the size of your monthly mortgage payment. Borrowing $200,000 at 6 percent for 15 years, for example, will cost you more per month than borrowing the same amount at the same rate for 30 years. Local mortgage officers and HUD counselors can help you identify potential costs and determine how much house you can afford. Of course, your credit rating will have a great deal to do with the interest rate you're offered, but that's another article.
While they won't make it final or actually give you any money until you've bought the house, many lenders will "pre-approve" you for a mortgage. This means that if all conditions stay the same, they expect to be able to lend you the pre-approved amount of money.
Pick a location.
Where do you want to live? Affordability is certainly one factor but so are a whole host of other things including proximity to work, places of worship or other family members, the school system, availability of services, rural versus urban or suburban, etc. Once you know how much house you can afford, you can start focusing on locations.
Work with an agent.
A real estate agent can help you find houses that fit your needs. Pick one who knows the area where you are looking and with whom you are comfortable. Be honest about your likes and dislikes and the amount of house you can afford. Real estate agents are most commonly paid a commission when a house is sold but in some cases there are pre-established fees. Make sure you sign a contract with any agent with whom you are working and make sure you understand the terms of that contract.
Make an offer.
Once you have found a house you like, you will need to make an offer. The price listed may or may not be what you deem fair. And you may have contingencies that you want included. Work with your agent to present an offer to the seller. Be prepared for negotiations as the seller may come back with a counteroffer.
Finalize the deal.
Once you and the seller have agreed on a price and contingencies, it is time to finalize the deal. You will need to get final approval on your mortgage application, hire a title company, hire an inspector to check the home for problems, pick an insurance company for homeowners' insurance, and find a mover. From beginning to end, this process can take as little as a few weeks or much longer. Just make sure you know the expiration dates for all of contacts. No one wants to see your hard work be wasted because you missed a deadline!