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Do You Know Enough about the Homebuying Process?

When you buy your first home, you have a lot to learn about the homebuying process and the decisions that need to be made along the way. You need to understand many new terms and make confusing decisions about mortgages, homebuyer programs, and more. What is PMI and will you have to pay for it? What is better for you, a conventional loan or an FHA loan? What homebuyer programs are available to first-time homebuyers in your area? Are you better off using extra cash to increase your down payment or using the money to buy points and reduce your interest rate?
You need to learn how to work with real estate agents and loan officers. You need to be able to negotiate on price, repairs, and seller incentives.

Bottom line, you have a lot of information to pick up in a short period of time.

Do you think you can learn everything you need to buy a home from your parents? Think again. When was the last time your parents bought a home? The process of buying a new home, mortgages, and qualification requirements all frequently change. Consumer protection laws have changed and you will be facing new forms and disclosures that your parents have probably never seen.

To add even more pressure, buying a home is probably the largest purchase you will ever make. Making a wrong decision can cost you many thousands of dollars over the life of your mortgage.

How can you learn more about buying a home?

If you don’t have the knowledge or skills you need to buy your first home with confidence, engage a non-profit organization like the HomeOwnership Center of Greater Dayton. Classes and interaction with experienced coaches will help you prepare your finances, understand the homebuying process, and ensure you make good homebuying decisions.

Call us at 937.853.1600 or visit our Homebuyer page to learn how we can help you buy your first home.

This is the sixth post in the series, Are You Ready to Buy Your Own Home? You can read the other installments in the series by following these links:

Part One: Is Your Credit History Good Enough to Buy a Home?
Part Two: Have You Saved Enough Money to Buy a Home?
Part Three: Are You Mortgage Ready?
Part Four: Are You Planning to Stay in the Home for the Next 5 to 7 Years?
Part Five: Are You a Realistic Homebuyer?
Part Six: Do You Know Enough About the Homebuying Process?

Are You a Realistic Homebuyer?

You have been dreaming of buying your own home. You have your finances in perfect order. You have a good steady job and you are planning on living in the home long term. According to television, all you have to do is visit three homes, decide which big expensive house you want and somehow, all of the details will magically work themselves out between commercials. Right? Wrong!

Buying your first home is hard work and requires patience and determination. When buying a home, nothing ever goes smoothly. There are always road bumps along the way and you need to be prepared to deal with them. You need to be a realistic homebuyer.

Being realistic means knowing that the home inspection could show that the roof will need replacement or that your lender needs more documents or clarification on the information that you did submit. Be prepared to have your personal finances picked apart under a magnifying glass. You will need to explain anything that your lender doesn’t like on your credit report. Do you remember being late on your rent two years ago because you needed to take your son to the emergency room? Your credit report hasn’t forgotten.

Being realistic also means buying a home that you can afford. Just because a bank is willing to lend you $180,000 to buy a house does not mean that you can really only afford to live in a $125,000 home.

When lenders look at your finances, they are considering your current income, credit history, and debt balances and payments. Remember those DTI ratios that we discussed in Part Three of this series? They are not looking at other expenses that might be very important to you. For example, the lender does not weigh the fact you are planning to go back to college to earn your masters degree. With more college debt in your future, buying the less expensive home might be a better choice for you.

How can you get real about buying a home?

If you are not ready to handle the problems that will arise in the homebuying process, you are not prepared to handle the real world issues that come with owning a house. The HomeOwnership Center’s First-Time Homebuyers Class can make you better prepared to have realistic expectations when buying your first home.

Call us at 937.853.1600 or visit our Homebuyer page to learn how we can help you buy your first home.

This is the fifth post in the series, Are You Ready to Buy Your Own Home? You can read the other installments in the series by following these links:

Part One: Is Your Credit History Good Enough to Buy a Home?
Part Two: Have You Saved Enough Money to Buy a Home?
Part Three: Are You Mortgage Ready?
Part Four: Are You Planning to Stay in the Home for the Next 5 to 7 Years?
Part Five: Are You a Realistic Homebuyer?
Part Six: Do You Know Enough About the Homebuying Process?

Are You Planning to Stay in Your Home for 5 to 7 Years?

You know that buying a new home is expensive. However, you might not understand that a significant portion of that cost happens up front, when you close on the home. Transaction costs come in the form of title fees, home inspections, loan origination fees, appraisal fees, and other closing costs. Long term, these costs would be recouped as you gained equity through your house payments and the home’s appreciation.

If you sell your home in two or three years, you won’t have had enough time to grow your equity. As a result, you won’t break even and will lose money in the process. Financially, owning your home for a short period of time is rarely a good idea.

Here is an example: You bought a $150,000 home three years ago.  When you bought the home, you made a down payment of 7,500 (5%) and covered closing costs of $6,000. Since you bought the house, you also replaced the furnace at a cost of $4,200 dollars.  That’s a grand total of $17,700 that you have invested in the home above and beyond your monthly house payment.

If you had a $142,500 loan ($150,000 minus your $7,500 down payment) in the form of a 30 year mortgage at an interest rate of 4.5%, you will have only paid off $7,219 of the loan’s principle. That leaves you $10,481 in the hole.

What if your house went up in value during the past three years? The house would need to have gone up in value at least $10,481 (a selling price of $160,481) for you to break even.

If your job is not secure or you are planning to move in the next few years, renting might be a better option.

Are you beginning to think there’s a lot you need to consider when buying your first home? 

You are absolutely right. Today’s homebuyers need to digest a lot of information and make many decisions that can have a huge financial impact on their future. Don’t worry. The HomeOwnership Center of Greater Dayton is here to give you the knowledge you need to make those decisions with confidence.

Call us at 937.853.1600 or visit our Homebuyer page to learn how we can help you buy your first home.

This is the fourth post in the series, Are You Ready to Buy Your Own Home? You can read the other installments in the series by following these links:

Part One: Is Your Credit History Good Enough to Buy a Home?
Part Two: Have You Saved Enough Money to Buy a Home?
Part Three: Are You Mortgage Ready?
Part Four: Are You Planning to Stay in the Home for the Next 5 to 7 Years?
Part Five: Are You a Realistic Homebuyer?
Part Six: Do You Know Enough About the Homebuying Process?

Are You Mortgage Ready?

Based upon your answers to the first two questions, you might have some idea about your ability to qualify for a mortgage. However, one of the most common mistakes that potential homebuyers make is to assume that they won’t qualify for a mortgage. Don’t assume that you wont qualify. Go ahead and meet with a lender and see if you can be pre-approved. If you don’t qualify, the lender will tell you why not and then you will know what you need to work on. Many of the HomeOwnership Center’s clients are sent to us by lenders so that we can show the buyers how to become mortgage ready.

Many realtors will not spend much effort on clients that are not pre-approved for a mortgage. Being pre-approved also gives you more negotiating power when dealing with the seller. So, get pre-approved for a loan before you start house hunting.

Here are some indicators that you may not be mortgage ready:

You have a low credit score: Just as we discussed in Part One of this series, lenders will take a hard look at your credit score and credit history. If your credit history is not good enough, you will either be turned down for a mortgage or you will pay a higher interest rate than a buyer with a good credit history.

You have a high debt-to-income ratio: A debt-to income ratio (DTI) is a simple comparison between how much debt you have and your income. The DTI is an indicator to lenders that you will have the ability to pay back the loan.

To find your DTI, simply add up all of your monthly debt payments and divide the sum by your gross monthly income (income before taxes). For instance if you had a monthly gross income of $2,000 and a total of $600 in monthly debt payments, your DTI would be ($600/$2000) or 30%. The lower your DTI, the better. A DTI of 43% or lower will qualify you for most mortgages. However, a DTI of 36% or lower would be preferred.

Some mortgage lenders may express your DTI as two numbers such as 28/36. The first number is the front end DTI while the second number is the back end DTI. A front end DTI compares your housing expenses (mortgage, home insurance, etc.) with your monthly gross income. The back end DTI is the debt to income comparison we discussed earlier. Our own down payment assistance programs require a back end DTI of 31/42 or 30/42 depending on the program.

Multiple recent credit applications: Buying a new car, applying for credit cards, and opening a charge account at a store are all bad ideas when you are preparing to buy a home. Each time you apply for credit, your credit score will temporarily go down. Even worse, your debt-to-income ratio will go up when you take on more debt. Here is a classic example of what not to do:
Your offer has been accepted and you will close in two weeks. Great! This is your first home and you want to run out and buy a new lawn mower and some tools for yard work using your credit card. You also want to open a new charge account to buy a couch and furniture for the extra bedroom. Good idea or bad? Bad. Don’t do anything that will impact your credit history until after you close on the home loan. That buying spree will alter your DTI and lower your credit score. When the lender pulls your credit history one last time before you close, you may no longer qualify for the loan. Hold off until after you close before using your credit cards or opening new accounts.

Unstable job history: Once again, lenders want to see that you can pay back the loan. Changing jobs frequently, job loss, and frequent layoffs can signal that you may not be able to make future mortgage payments, leading to default. An unstable job history is a red flag to lenders.

Lack of savings: Lenders want to see that you have money in the bank. Why? You will need cash for the down payment and closing costs. You should also have cash set aside for emergency savings so that you can replace the hot water heater and make other repairs as they become necessary. Read Part Two of this series to learn more about the cash you will need to buy a home.

What can you do when your credit history doesn’t measure up?If you are not mortgage ready, you should contact the HomeOwnership Center. Our classes and coaching programs will help you to set financial goals and give you the information and skills needed to reach them. We will set you on the right path to homeownership.

This is the third post in the series, Are You Ready to Buy Your Own Home? You can read the other installments in the series by following these links:

Part One: Is Your Credit History Good Enough to Buy a Home?
Part Two: Have You Saved Enough Money to Buy a Home?
Part Three: Are You Mortgage Ready?
Part Four: Are You Planning to Stay in the Home for the Next 5 to 7 Years?
Part Five: Are You a Realistic Homebuyer?
Part Six: Do You Know Enough About the Homebuying Process?

Have You Saved Enough Money to Buy a Home?

Do you have enough money for a down payment, for closing costs, and to have an emergency savings fund?

Typical mortgages will require you to have a down payment equal to at least 3% of the home’s purchase price. On the other hand, some specialty mortgage products (such as VA loans and Rural Development Loans) may not require any down payment at all. However, the more money you can put down on your new home, the better off you will be. A low down payment can lead to higher interest rates and requirements for you to have mortgage insurance. Each of these will significantly add to the long term cost of the home. The bottom line? On its own, not having a 20% down payment should not be a stumbling block to buying a home.

You will need more than just a down payment. When you buy your home, you will also need to pay closing costs. Closing costs represent the actual transactional costs of buying a home. Those costs can include loan application fees, taxes, title searches, home inspections, and more.  It is important to understand that closing costs represent actual costs and are not based upon a percentage of the home’s selling price. Closing costs do not have to be covered by the homebuyer. You can negotiate to see if the seller will pay all or a portion of the closing costs. Your lender may also be willing to roll the closing costs into the loan.

You should also have money set aside for an emergency savings fund. It’s pretty rare these days for a lender to require that you have some kind of cash reserves. However, as a homeowner, you will need cash that will allow you to make repairs to the home as they become necessary. When a storm blows a branch through a window or your hot water heater goes out, you are the one that will need to make repairs and replace equipment.

What can you do when you haven’t saved enough money to buy a home?

Recent polls have shown that saving up for a down payment is the largest hurdle for first time homebuyers. Many people don’t understand closing costs or the need to have an emergency savings account. If you are struggling to save the cash required, we might be able to help. The HomeOwnership Center has Down Payment Assistance programs and Financial Fitness classes that can make a real difference to you.

This is the second post in the series, Are You Ready to Buy Your Own Home? You can read the other installments in the series by following these links:

Part One: Is Your Credit History Good Enough to Buy a Home?
Part Two: Have You Saved Enough Money to Buy a Home?
Part Three: Are You Mortgage Ready?
Part Four: Are You Planning to Stay in the Home for the Next 5 to 7 Years?
Part Five: Are You a Realistic Homebuyer?
Part Six: Do You Know Enough About the Homebuying Process?