Home ownership, symbol of the American Dream, is in every immigrant's mind. But home buying is such a complicated process that people are often intimidated to start. Here we offer a simple step-by-step guide to help you learn more about the process and hopefully one day become a proud home owner.
The first thing you want to do is to sit down and list all of your incomes and expenses on a piece of paper, or in an Excel spreadsheet, whatever you prefer. The goal is to figure out how much you can truly afford. The skyrocketing foreclosure rates in 2007 make it clear that you do not want to ignore this step.
When counting your expenses, do not just focus on what you spend now, rather, what the future costs would be after you own a home:
Add up your expenses and then use a finance calculator to figure out how much you can afford.
Your target should be paying down 20% of the home price. Anything less than 20 percent would require either a second loan, or a private mortgage insurance (PMI), costing more money either way. Most people struggle a little bit, but with careful planning, you should be able to do it without too much stretching.
Yes, your credit score counts. It directly impacts what interest rate you will be getting, and a half point difference can cost you over $30,000 for a $300K mortgage fixed at 6.5%. Remember, higher score = lower monthly payment.
Searching for a home is fun and exciting, but always keep your budget in mind. You want to think into the future, but not out of your range. Confused about different types of houses? Check out this page to learn about single-family, townhome, and condo.
Driving around a desired neighborhood is always a good idea. You can also tap into the vast resources on the internet:
Also think about whether you want a brand new house. The good thing about new homes is that you get to do everything from scratch: flooring, yard, appliances, all. The bad? You have to do everything from scratch. Your bare-bone house will look nothing like the model home you toured, unless you spend significant efforts, and money, working on it.
A buyer's agent may also help with the hunting and negotiation, and their commission comes from the seller's wallet, not yours. But since you are the only one paying, you get the idea. So make sure you ask around for referrals before hiring a realtor, and make sure you can fire him or her if it doesn't work well.
Spend a lot of time studying various mortgage options:
Fixed rate mortgage means your interest rate remains the same during the course of the loan. The most common option is 30-year fixed, followed by 15-yr fixed. Your monthly payment doesn't change until you pay off the entire amount, even if you pay extra money toward principals. However, extra payments will shorten the length of the loan, e.g., you may be able to pay off the house in 25 years instead of 30.
Adjustable Rate Mortgage (ARM) is different, because interest rate is adjusted periodically based on index fluctuations. For example, a 5/1 ARM means your interest will be fixed for the first 5 years, then adjust once a year thereafter. As a result, you monthly payment may go up significantly after the initial fixed period.
Caps - ARM loans usually come with a very important feature: caps. There are three common caps to limit borrowers' risks: 1. how frequently the interest rate may change; 2. maximum interest rate change per adjustment; and 3, maximum rate change over the life of the loan.
Points - A point is one percent of the loan amount that you pay up-front in order to get a lower interest rate. If you intend to live in the residence for an extended period of time, buying points may be a good idea.
Making an offer is an art all by itself. Market condition is critical in terms of where you should start, but expect a few rounds of back-and-forth before you can reach a deal. Although total price is the most eye-catching item, don't overlook earnest money and contingencies.
If your offer is accepted, you can then conduct a home inspection. It is best to hire a professional for the job, because you want to make sure the foundation, the roof, the plumbing, and of course termites, are checked thoroughly.
Before hiring a home inspector, ask the following questions:
You also need to shop for home insurance at this point of time. Contact your auto insurance company first if you have one, because most insurers offer multi-policy discounts. Call or fill out online forms to receive quotes from different companies. Ask for other discounts. Consider raising your deductibles. And carefully review your offers especially annual premium, deductible, and home replacement coverage.
Immediately after your offer is accepted, you need to be actively shopping for a mortgage. You want to compare several offers from different lenders because they can vary dramatically. A good place to start is Quicken Loans , where you can get a quote in less than a minute. Banks and credit unions often have mortgage specialists, either online or in person, to handle your application or answer questions.
Pay special attention to the lock-in period on your quote, which is the lender's promise to hold your interest rate and other terms for a specified period of time, while your loan application is processed. 60-day lock-ins are common, but you may also see 30 days or 90 days quite often.
In addition to interest rate, you want to read closely what fees are listed, and for what purposes.
If all goes well, it is time for closing, the final step of your home buying journey.
In western states of the U.S., closing is usually handled by an escrow company. Sellers and buyers don't have to meet at closing, and the escrow company will arrange for signing documents, money transfer and handover of ownership. On the Eastern side, buyers and sellers usually meet at a settlement company and complete the transaction.