Purchasing a home can be a long, confusing and often frustrating process. Some may not be up for the challenge, while others may want to put off the process for a few more years. Either way, becoming a homeowner is large responsibility. For some, purchasing a home maybe the largest investment they will make in their lifetime. For this reason, people should make wise and appropriate decisions when it comes to purchasing a home weather for an individual or a family. No one wants to be trapped in an investment, paying more for a home in value than what it is worth. Considering the economic climate, individuals must do what they can to ensure they receive a fair deal on home and property purchases. Due to this, becoming a homeowner is something that people should do with special consideration with guidance and support throughout the process.
When searching for a home, many are side tracked by the idea of becoming a homeowner. They canvas neighborhoods and sales ads looking for a perfect home for their family. However, this is not the first step individuals and families should take when purchasing a new home. First and most importantly, potential buyers should shop for a lender or mortgage before looking for a home to purchase. A lender will let you know, “how much you can borrow”, (Schuen, 2009). In this market, people can obtain a mortgage or find a loan from different sources. This includes thrift institutions, commercial banks, mortgage companies, and credit unions, (HUD.gov, 2012). It does not matter who you get a loan through, it is most important that you get a good deal that is right for you and your family.
Unless the buyer already has this amount of money on hand, mortgage loans are necessary when purchasing a home. However, some do not have access to large sums of money on-hand. Although homes can range from as low as $30,000 to millions, many go through the formal process of obtaining a loan to purchase their home. There are different loans that a potential owner can find. This includes “fixed-rate loans, adjustable-rate mortgage (ARM), government mortgages, and jumbo mortgages”, (USBank.com, 2012). Mortgages rates vary from person to person. While one person may only be required to pay 3.5% interest another lender may require as much as 20% on their loan. Therefore, loans are one of the most important things to consider when purchasing a home. It can determine what you pay, how much you pay, and how long you will pay it. Buyers have an option between 15, 20, 25, and 30 year mortgages.
Each mortgage product has different plans and rates, advantages and disadvantages. It is up to the potential buyer to figure out which product best fit individual needs. Fixed-rate loans are the most popular. Fixed-rate loans are “fully amortized on a set term and have no pre-payment penalty”, (FHA.gov, 2012). This allows the home owner to payback their loan at a fixed-rate, meaning that the principle and interest is unchanged and the terms of the loan will remain stagnant.
Potential buyers can also receive an adjustable rate mortgage (ARM). With this mortgage, the amount of money paid on the loan is adjustable. This means the amount paid back can fluctuate over the years. ARM rates may increase or decrease as much as 1% to 2% per year, 6% over the lifetime of the loan, and can reach its maximum rate in 3 years for most conventional plans, (FHA.gov, 2012). Some people may prefer an adjustable rate, especially those who can pay off their loan early or will own their property for a short period.
Government mortgages are also available to the public. This includes, Federal Housing Administration (FHA), Department of Veteran Affairs (VA) and Rural Development Services, (HUD.gov, 2012). Government programs allow subsidies for individuals who are low income, disaster victims, those who serve in the US military, and first-time buyers. Government programs typically provide low or no down payments, interest rates, and provide private mortgage insurance for buyers at risk of default.
Lastly, Jumbo mortgages are available for property investors or those interested in purchasing a second home or more than one home. Buyers interested in jumbo mortgages generally require a loan that exceeds half a million dollars and use “flexible loan terms”, (USBank, 2012).
When shopping for a mortgage, lenders require you apply for a loan. This process allows buyers to pre-qualify and become pre-approved. “Pre-qualification is a preliminary review of your credit report… to help us decide what mortgage financing options are available”, (USBank, 2012). A person’s credit report determines how much a lender will give to a buyer, the interest rate on the loan, and your required down payment. For example, the FHA has set guidelines and requirements for home loans based off credit score. Individuals with a credit score over 580 are required to pay 3.5% while individuals with a credit score lower than 580 are asked to pay 10% down payment, (FHA.gov, 2012). With this in mind, some people may want to put off a home purchase. A good credit score can make a big difference on how much you pay for your home. “To qualify, you may have to accumulate a large down payment or accept a higher interest rate than you might like”, (Elliott, 2010). For some people, they can save money holding off on a purchase for a year to improve their credit and save cost.
Once an individual is pre-qualified, providing the appropriate documentation such as W-2, pay check stubs, bank statements, employer information, security accounts, assets, and monthly debts, he or she will receiving a notification of pre-approval. “Pre-approval is a financial evaluation that involve applying for a mortgage, underwriting, and a commitment by the lender to a specific loan amount”, (USBank, 2012). Approved for a loan, a buyer can begin the process to purchase a home. This will involve a written commitment between the lender and the borrower. The borrower must agree by signing a Settlement Cost and Intent to Proceed notification. There will also be a Good Faith Estimate. This estimate, “itemizes your estimated closing cost, loan approved, and closing date”, (Shuen, 2009). Both documents will let the buyer know how much will be needed for a down payment and closing cost. These costs can be substantial, totaling as much as $10,000 or more. Therefore, a buyer must be aware of this and prepared to make this payment once he or she finds her home to purchase.
When the buyer is approved, he or she can find a home on the market that does not exceed the lender’s offer. Buyers can take advantage of a real estate agent, make an offer on a home, and wait for a reply. Once the offer is accepted, the buyer may be asked, “to pay a binder… a deposit of say 1% until the contract is signed”, (Schuen, 2009). It may take a significant period between when the offer is accepted and the closing contract signed on the house. During closing, the buyer, seller, and agent can go over contingencies for the home. As the closing date nears, contingencies allow the seller to make, “all goes well conditions” for the home. Without this, a buyer may be forced to purchase a home that he or she no longer wants. Contingencies ensure that there are no major problems with the home and that it meets various standards such as a clear title and adhere to zoning laws. Therefore, it is important that buyers are aware of and fully utilize the options made available to them. Closing cost are also required, which include “attorney fee, title insurance, appraisal fee, home inspection, partial property tax, courier fees, mortgage points, government recording fee, and/or transfer tax”, (Shuen, 2009). The mortgage application and associated cost will be collected. The buyer will be asked to return for a closing to sign papers and ensure all cost has been paid. Once signing the appropriate documents at closing, the buyer is now a home owner.
Purchasing a home can be one of the biggest investments an individual will make in their lifetime. Home and property can last longer than a lifetime and pass on through a family for generations to come. Becoming a home owner is part of the American dream. The home is now property of the individual who may use the home as they so please. A home is where the heart is and is part of the family unit. Today, as many people face foreclosure and loss in property value due to the housing crisis, many people can take advantage of this. It can provide security for the family and testimony to an individual’s hard work.
Department of Housing and Urban Development, Federal Housing Finance Board. (2012). Looking for the best mortgage. Retrieved from Housing and Urban Development website: http://www.hud.gov/buying/booklet.pdf
Elliott, S. (2010). Can you buy your first home with bad credit. Retrieved from http://tlc.howstuffworks.com/home/buy-first-home-with-bad-credit.htm
Federal Housing Authority, Department of Interior. (2012).Fha mortgages. Retrieved from Federal Housing Authority website: http://www.myfha.net/
Schuen, J. (2009). What are the steps involved in buying a house. NBC News. Retrieved from http://www.msnbc.msn.com/id/16949932/ns/business-answer_desk/t/what-are-steps-involved-buying-house/
US banks; first time home buyers. (2012). Retrieved from https://www.usbank.com/mortgage/needs/first.html