Buying a home is a complex process, so it pays to understand the basics before you start. The PAH Homebuying 101 series covers the most important things you need to know about buying a home, from getting your documents in order to costs, contracts, and closing.
Get Ready, Get Started, Get Organized
Start a folder with lists and copies of the following information and documents. Additional information may be needed, but these are the basics.
- Copies of 2 most recent pay stubs
- Copies of most recent bank statements
- Copy of most recent tax return
- Documentation for any other sources of income
- Family members' names and addresses (for the past 5 years) and Social Security numbers
- Landlords' names, addresses, and phone numbers (for the past 5 years)
- Places of employment (for the past 5 years, most recent first) with addresses, phone numbers, supervisor contact information, and employment dates
Important People Involved in the Home Buying Process
Some of the key people you will encounter:
- The Homebuyer Counselor is a trained certified professional who can provide homebuyer education classes or individual counseling sessions teaching the home-purchasing process.
- The Real Estate Agent helps you find homes that meet such needs as location, type of home, and price. Agents are usually paid a commission from the seller’s sales proceeds.
- The Mortgage Lenders are the financial institutions that provide the funds for the mortgage. Lenders can be banks, saving associations, credit unions, mortgage companies, mortgage brokers, government agencies, or private individuals.
- An Attorney who specializes in real estate law can write the real estate contract, do a title search, and conduct closings.
- The Housing Inspector checks the structure and condition of the home being purchased and provides a written report describing any repairs, general maintenance and safety issues that need to be addressed. The purchaser is responsible for the cost of the inspection.
- The Appraiser is hired by the mortgage lender to estimate the value of the housing being purchased and to determine its fair market value. How much money the lender will lend to you is determined by the appraisal results.
- The Insurance Agent provides the necessary homeowner’s insurance that will protect your home from casualty and liability.
Your Credit and Why It's Important
When you’re ready to buy a home, your lender will require a credit report. A good credit rating shows lenders you’ve been responsible. With good credit you’ll be able to:
- Rent or buy things you want or need
- Borrow money at a lower interest rate
- Lease rental property
- Open bank accounts
- Establish utility services
- Obtain insurance at a lower rate
- Obtain employment
Credit reporting agencies/bureaus collect information and sell it to such creditors as banks, finance companies, stores, landlords, insurance companies, and employers. The lender will request a credit report on your behalf, but you may have to pay a processing fee. National companies (Experian, TransUnion, Equifax) supply the majority of credit reports. Key types of credit reports are:
- Consumer credit report: One bureau report (no score) available to you annually at no charge.
- Infile credit report: One or more bureau reports, assessed by a creditor to check your credit and/or score.
- Residential Mortgage Credit Report (RMCR, also known as tri-merge): Credit report and score from all three bureaus to determine your credit worthiness for a mortgage loan.
Shopping for a Home
Although the time it takes to become a homeowner can vary, steps in the homebuying process are generally the same for everyone. Smart buyers take advantage of all the professional help that's available along the way.
- Prepare: Carefully weight the pros and cons of homeownership in your current situation. Attend homebuyer education classes and individual counseling sessions.
- Determine how much you can afford to spend: Prepare a realistic spending plan that includes all of your monthly obligations and regular expenses.
- Get your loan approved: Visit a lender and apply for a loan before you have found the house you want to buy.
- Decide what kind of home you want and/or need: Consider affordability, family size, lifestyle, and special circumstances.
- Shop for a home: Hire a real estate agent. Compare and examine homes on the market. Take notes and ask questions.
- Make an offer: Make a written purchase proposal accompanied by earnest money and contingent upon a satisfactory home inspection. Negotiate if the seller makes a counter offer.
- Get a home inspection: Hire a professional home inspector. If there are any problems, cancel the sale or ask the seller to make the repairs or give a credit.
- Apply for a mortgage loan: Complete a formal application at the lender’s office.
- Obtain insurance and have additional inspections: Shop for and buy a homeowners insurance policy. Hire an attorney or title company to conduct a title search, and issue the lender a title insurance policy. Schedule additional inspections, as needed.
- Close the loan: Sign closing documents and pay closing costs. Receive the keys to your new home!
What to Consider: Rent or Own?
Before you decide, you’ll need to assess your needs, situation, and plans. Here are some pros and cons to think about.
- RENT: The monthly cost may be lower, but there is no tax advantage. OWN: Monthly payments are usually higher, but interest and property taxes can be deducted when filing federal income tax (itemizing).
- RENT: Home maintenance and repairs are the landlord's responsibility. OWN: Maintenance and repairs are your responsibility.
- RENT: Equity — After you make your monthly payment, the money is gone. OWN: Over time, equity accumulates; if the house value increases, you may be able to borrow against equity or convert to cash when selling your home.
- RENT: Freedom vs. responsibility — You can move at the end of your lease. OWN: You can't move until you sell our rent your home. If you fail to pay your mortgage, you could lose your home and damage your credit.
- RENT: Privacy/security — You may not have privacy. Your landlord may sell the property, evict you, or raise your rent. OWN: Your home is yours. Fixed rate mortgage payments remain the same.
Source: NeighborWorks America, Realizing the Dream.
The first step in starting a plan to meet your goals is to get a realistic picture of how much money is coming in and how much is being spent. You’ll need to track, on a monthly basis for at least two months, your income and expenses. Here are most of the items to include:
- Income Items: Net income from jobs (take home pay) for every household member; Second job (take home pay); Regular overtime; Public assistance; Child support; Pension; Social security.
- Expense Items: Housing; Transportation; Food; Clothing; Insurance; Medical; Childcare; Donations; Education; Entertainment; Gifts; Personal debts.
Obtaining a Mortgage Loan
Finding the right loan is just as important as finding the right home. Here are the basic steps:
- Research: Shopping around for a loan with the best rates and terms can save you a lot of money in the long run. In today’s market there are many types of loans available at varying costs.
- Pre-approval: Meet with the lender of your choice to find out if you qualify for a mortgage and if so, how much you can afford to spend on a house.
- Loan Application: The standard mortgage application includes questions about your income, assets, debts, and credit, as well as the property you wish to purchase.
- Loan Processing: A loan processor completes your loan package by verifying your information and the value of the property.
- Underwriting: A loan underwriter reviews your application and decides whether to approve it.
- Approval: If you are approved, the lender sends you a commitment letter with a formal loan offer that you are given a set amount of time to accept or reject.
- Loan Closing: The closing is a formal meeting at which the buyer and seller sign the paperwork to complete the sale.
Protecting Your Investment
Your house is probably the biggest investment you’ll ever make, so you’ll want to protect yourself and your family by taking good care of your home and continuing to manage your finances wisely. Doing so includes:
- Making your home safe and energy efficient. Design a home safety program and take advantage of energy-saving tips provided for free by local utility companies.
- Keeping your home in good repair. Practice preventive maintenance by learning how everything in your house works and taking care of appliances and systems before they fail.
- Deciding when and how to remodel or make major repairs. Before you make any major improvements, talk to your real estate agent to learn how they will affect the resale value of your property.
- Getting to know your community. Becoming active in your neighborhood is part of protecting your investment, and by getting involved, you can make a difference in the quality of life in your community.
- Managing your money for homeownership. There are many ways to protect and use your home equity. These include keeping organized records; paying taxes and taking advantage of homeowner benefits; reviewing and updating your homeowners insurance policy; knowing when to consider refinancing; and understanding your mortgage payment options.