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Breaking Down the Buying Process for New Buyers

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Table of Contents

DOS AND DON’TS OF NEGOTIATIONS

Ten | 63 WHAT TO KNOW ABOUT HOME INSPECTIONS Eleven | 69 THE CLOSING PROCESS Twelve | 77 MOVING TIPS FOR THE FIRST-TIMER Thirteen | 85 REAL ESTATE HORROR STORIES

Part 1: Getting Started

CHAPTER 1

OWNING VS. RENTING Owning your own home may be one of the defining qualities of the American Dream, the set of ideals that includes opportunity for prosperity and success, and an upward social mobility for the family and children, achieved through hard work. Homeownership has long been considered one of the strongest representations of that vision — 66% of Americans own their own home, and many more hope they will or wish they did. Something about homeownership plucks a strong chord with Americans. Financial security, permanency, status, or pride; whatever the reason for wanting to own your own home, there has never been a time in recent memory when the health of our credit reports has meant so much as when we decide to buy a home of our own. Lifestyle plays a big role in the decision to own versus rent. Home-buying is most often driven by household formation, such as marriage and childbirth, but not always: for the millennial generation, the primary reported reason for buying a home is owning a dog. Age is also a major factor in general: less than 40% of people under 35 years old own homes, while 60% of people over 35 years old own homes, and more than 80% of people 65 years old or older own homes.

The U.S. homeownership rate has fluctuated between 62% and 70% since the 1950s. Most young people begin their independent lives renting an apartment, maximizing lifestyle flexibility and minimizing the hefty upfront costs associated with purchasing a home. As they build careers, save money, and start families, many choose to buy a home, recognizing that homeownership as opposed to rental living better accommodates their growing family needs. Their needs may be better filled by a single-family house, condominium, townhouse, or duplex of their own. At the other end of the age spectrum are homeowners nearing retirement who may now desire to sell their homes, downsizing and avoiding the maintenance and other obligations of homeownership by renting. WHICH IS BEST? Is it better to rent or buy a home? Virtually all adults ask themselves this at some point as they form their goals and plan for the years ahead. Owning and renting each have their advantages, but what is best for you depends on your circumstances. Before you decide, here are some things to ask yourself. ? How long will you stay in the home? Each market is different, but whether the time you plan to spend in the house warrants its purchase can be predicted. In general terms, it takes four to seven years to break even on a home (i.e., where there has been enough appreciation to pay back the cost of the transaction and cost of ownership). If you are thinking about buying a home and selling it in two years, it is very unlikely that buying will be cheaper than renting. ? Do you think of or need your house as an investment in your retirement plan? Americans are used to their homes being a store for wealth they can liquidate in retirement as part of downsizing their lifestyle. In 2015, Gallop reported for the second straight year that more Americans named real estate as the best long-term investment, over stocks, gold, savings accounts/CDs, and bonds. Real estate leads with 31% of Americans choosing it, followed by stocks/mutual funds, at 25%. A cautionary note though — although home prices have

recovered from their pre-2007 market slump and continue to rise, the price of your home can still fall. ? Are you financially ready? Owning a home is a financial commitment that requires planning how homeownership will fit into where your life is headed. Ask yourself what your budget is and if either buying or renting would require you to stretch your finances. Crunch all the numbers. A frequent mistake of first-time homebuyers is comparing a month’s rent to a month’s mortgage payment. There are many additional fees necessary to include to make a fair comparison: principal interest, property taxes, property insurance, homeowners’ association fees, and maintenance. ? Are you prepared for the down payment? This is the lump sum payment that funds your equity in the property (how much of the property you actually own). Down payments vary; 20% is preferred and gets the best rates. There are some loans that allow down payments as low as 3%. Sometimes, relatives contribute to the down payment. If you have an opportunity, take a gift rather than a loan because lenders will add that debt to other monthly obligations and potential mortgage payments to determine your debt-to-income ratio, which generally can’t top 43% to qualify for a home loan.

? Can you afford the monthly mortgage and its components? Generally, a mortgage includes loan principal and interest (both amortized over the life of the loan) plus homeowner’s insurance and property taxes (which are pro-rated). These items can affect the monthly loan-only payment by several hundred dollars. ? Are you emotionally ready? Can you handle the stress? A big factor to consider when buying a home is stress. The Holmes and Rahe Stress Scale, a landmark stress study, ranks many events that go along with buying a home in the top 43 most stressful circumstances in life. Four events are specifically home- related: change in financial state (No. 16), large mortgage or loan (No. 20), change in living conditions (No. 28) and change in residence (No. 32). If someone has recently made other life changes such as marriage (No. 7), switching careers (No. 18) or having a child (No. 14), it might be wise to postpone buying a home. Stress overload can lead to missed payments, which can destroy your credit or even make you lose your home. It’s better to rent if your life is in flux, and then buy when your stress levels are lower. ? Are you ready for commitment? Are you ready to make lots of decisions, from picking a real estate agent to picking paint colors? Are you confident enough to choose a neighborhood where you believe home values will continue to appreciate in value and that will serve your needs (e.g., proximity to schools, shopping, recreation, etc.)? Are you ready to devote the time and attention to maintain a home (e.g., leaf-raking, grass-cutting, appliance maintenance and repair, etc.)? Taking care of your investment can be gratifying, but only if you are prepared. ADVANTAGES OF BUYING YOUR HOME ; ; Control over housing expenses. By selecting a fixed-rate 15-, 20-, or 30-year mortgage, the homeowner has assurance that housing costs will not increase over the period, and, in fact, will be eliminated at the end of the term (subject to refinancing).

; ; You build equity. Some of each monthly mortgage payment goes toward the loan’s interest. Other portions may go to homeowner’s insurance and county taxes. The remainder pays down the loan principal. Every dollar put toward your loan’s principal represents a dollar of equity — actual ownership of the property. Further, the property should appreciate in value each year, adding to equity (the difference between the current fair market value of a property and the amount of debt owed against it). With certain blip periods such as the 2007 housing bubble burst, home prices in the US appreciate nationally at an average annual rate between three and five percent (home value appreciation in different metro areas can appreciate at markedly different rates than the national average). ; ; Improvements increase your home’s value. A homeowner can also increase a home’s value through home improvements, thus both making your home more comfortable and enjoyable while growing its loan-to-value (LTV) ratio. For instance, adding a bathroom or finishing a basement substantially increases the property’s functionality and curb appeal, while potentially boosting its value. ; ; Tax advantages of homeownership. You qualify for major tax benefits when you buy a house, both at the time of purchase and for the remainder of period you own the home. • Homestead exemption. Many states exempt any and all owner-occupied homes (homesteads) from a portion of the property tax amount that would normally accrue. For instance, Louisiana exempts the first $75,000 of a home’s value from property tax assessments, such that a $200,000 home in New Orleans is taxed as if it were only worth $125,000. • Federal tax deductions. Property taxes and interest paid on your mortgage can be deducted if you itemize your federal income taxes, reducing your income tax burden. Additionally, discount points can be claimed on the loan. Mortgage points are generally of two types: discount points

and origination points. Each of these points is equivalent to 1% of your mortgage. Discount points involve prepaid interest, are tax deductible, and can reduce your total mortgage payment. The interest rate on your mortgage typically lowers by 0.25% per point you buy. ; ; Current mortgage rates are relatively low. Interest rates rise and fall through the years. Several years ago, interest rates were higher, and it was more expensive to obtain a mortgage. Since these costs have been reduced, it is now easier and less expensive to own a house. ; ; Ownership rights and creative freedom. Your decorating and home improvement choices are just that — yours, provided they don’t break building codes or violate homeowners’ association rules. You can paint walls any which way, add fixtures, update or finish your basement, or build a patio or deck. Changing your environment to suit your whims is a freeing aspect of homeownership. ; ; A sense of belonging to the community. Homeowners tend to stay in homes for longer than renters and are more likely to grow roots. They might join a neighborhood association, sponsor block parties or National Nights Out, volunteer at a nearby community center, join a school group, or align with a business improvement district. Renters might not do any of those things, particularly if they know their lease is up in a year and they might move. There is an intangible pleasure attached to owning your own house, a sense of freedom and independence. The home you live in belongs to you and only you (and, perhaps, your spouse), and you can do what you want with it. You are not daunted by increases in rent or the risk of losing your lease. You are free to make improvements and changes. Also, owning your home gives your children the guarantee of attending the schools in the area on a more permanent basis; you never have to worry about a notice from the landlord to vacate your rented house or apartment for any of a variety of reasons over which you have no control.

ADVANTAGES OF RENTING It seems a shorter list, but one man’s pro is another man’s con, and there are definitely advantages to renting you should factor into your buy-rent decision. ; ; No responsibility for maintenance. Admittedly, this is a big one. As a renter, you’re not responsible for home maintenance or repair costs. If a toilet backs up, a pipe bursts, or an appliance stops working, you don’t have to call an expensive repair person— you just call your landlord or superintendent. Renters in condos, townhomes, or apartments do not have lawn and grounds care obligations. ; ; Relocating is easier. When renting, relocating for work is easier. Though a sudden move may require you to break your lease, you can partially offset the cost by subletting your apartment or talking with your landlord. On the other hand, selling a home takes time and effort. If you have a short timeline to sell your home, youmay be forced to accept a lower price and lose some of your investment. ; ; No real estate market exposure. Home values fluctuate and can decline over time. If you’re a renter, that’s not your problem. If you’re an owner trying to sell — it is.

DISADVANTAGES OF OWNING

: : Maintenance. The renter’s largest advantage may be the homeowner’s largest disadvantage. While insurance is available to protect against expenses from major catastrophes, everyday maintenance items are on the homeowner’s dime. Maintenance and repair can be as simple as repainting the baseboards or as extensive and expensive as replacing anH/VAC systemor sewer pipe. The expense will vary from year-to-year; however, you can expect to pay about one percent of the value of your home annually toward these expenses. If you live in a $300,000 home for 10 years, that’s $30,000 over the period, and possibly more if you must replace a costly, long-lived mechanical item, such as a furnace. Keep in mind the usual homeowner’s chores of lawn care, snow removal, gutter cleaning, and other regular home maintenance needs. : : Upfront & closing costs. Buying a home entails numerous upfront costs. Some are paid out-of-pocket after the seller accepts your purchase offer, while others are paid at closing. These include earnest money, down payment (typically ranges from 3.5%— chiefly for Federal Housing Administration (FHA) loans — to over 20% of the purchase price), home appraisal, home inspection, property taxes, and first year’s homeowner’s insurance. : : Loss of relocation flexibility. It is much easier to break a lease and move out of town than to arrange for the sale of a residence. Selling the home from out of town involves its own special logistical and financial problems, such as dealing with the mortgage while the home is on the market. : : Financial loss potential. Homeownership builds equity over time; however, equity doesn’t equal profit. If home values in your area go down or remain stagnant during your time as a homeowner, the appraised value of your home could decrease, putting you at risk of a financial loss when you sell.

DISADVANTAGES OF RENTING : : No equity. The monthly rent you pay goes to the landlord. It represents the fee you pay for using the property. You gain no ownership in the property, no matter how long you live there. : : No tax benefits. While homeowners can deduct property taxes and mortgage interest on their tax returns, renters aren’t eligible for housing-related federal tax credits or deductions. : : Home improvements go to the landlord. Any structural or decorative home improvements renters make belong to the building owner and will have to stay behind when you move to a different place. Additionally, approval will be necessary for any major redecoration. After all is said, the decision to buy or rent depends on the prospective homebuyer’s circumstances. There is no denying, though, that a home of your own is a good financial and emotional investment. An investment in a home can also mean an investment in the future of your children. There can be nothing better than leaving a home behind as a legacy for your children to enjoy. There is much to consider when you want to buy a home. Switching from renting to homeownership is highly challenging, but an exciting and amazing decision to make.

Owning your first house is the first real step toward the perfect home you’ve been dreaming of. Because, at the end of the day, as we all know, there really is no place like home. • • •

CHAPTER 2

NEEDS AND DESIRES After the decision is made to buy a home, what sort of home it is to be is the next decision point. Imagine your dream house. It fulfills both your needs and desires. It fits the need for a good roof over your head, a sturdy structure, modern fixtures and appliances, living space (e.g., bedrooms, living room) and function rooms (e.g., kitchen, bathrooms). Your needs fulfilled, you turn to your desires. A home on the beach or in the woods, a gourmet kitchen, a wood-paneled den, crystal chandeliers hanging over a banquet table in the manor-sized dining room and an Olympic-sized swimming pool with a hot tub and sauna. In your first home, you must ensure all needs are met; however, there are probably going to be some desires that you will have to let go for now due to affordability issues. Decide which qualities are your needs and which are only desires. • Would you like a swimming pool? Enough that a home without one is not worth looking at? • In what areas or neighborhoods might the home be located? Where do you want to live? Where might you have to live for work commute or home price reasons? • What features would make it special and which ones matter most? • What can you afford and what is out of your budget? Budget usually constrains us most in selecting a home. While some things are necessary for any home (as mentioned, a good roof, a working furnace, a solid frame), others will just have to stay on the list of desires for now (the sauna, or that Beverly Hills address).

MAKE A LIST. CHECK IT TWICE. You may have an existing impression of what you want from your new home. Putting that to paper and having a complete checklist can prove useful. Before starting your hunt for a new home, it is advisable to make a list of all your basic needs and desires, then rank the desires by priority, assuming that all needs must be met for a house to merit consideration in the first place. This will make the search easier. Realize that it is nearly impossible to find a home that meets all requirements at once in both needs and desires, though. Compromises will be necessary. It is a good idea to work in order from outside-the-house factors to inside-the-house. For example, location is perhaps the primary concern and both “need” factors and “desire” factors might be involved. A “need” would be “must be within 25 miles of work.” A desire might be, “would like Westwood” (a favored neighborhood), while a need might be “on west side of city,” (because work, family, friends, and recreation activities are all located there). Location needs may include proximity to schools, frequently used recreation facilities, or mode of transportation (bus or suburban rail access). Whether an item is a need or a desire depends on circumstance. Closeness to family might be a need for a couple with young children or elderly parents to care for, or a desire if those factors are not involved. It is items like these that make a checklist helpful.

After location needs and desires are compiled, housing factors can be considered. Needs include having all essential house structures and systems in good working order. Accepting a house that needs a new roof because the owner is willing to knock $7,000 off the listing price is not a sensible deal when it will cost $10,000 to replace the roof in two years. Needs might include a minimum number of bedrooms and bathrooms, no steps, fenced yard (for pet owners or simply for privacy), perhaps a first-floor laundry facility, and any feature the prospective buyers have decided they cannot accept a home without. Desires are features that make the home more attractive or enjoyable — an upgraded kitchen, walk-in closets, a master bedroom suite. Of course, one buyer’s need is another buyer’s desire. The point is to know your own needs and desires so you can easily assess potential properties. Buying a house is not a simple process. Much of the planning should be done well in advance of contacting a real estate agent or looking at houses. Work out the costs and decide your budget. Choose a general location. Contact lenders well ahead of home shopping so your offers are not tied up in getting financial approval. Having the image of your dream home is reality married with imagination. In fact, you may find that some aspects of the house you intend to buy are different. It’s not the same as what your dreams would have told you. Different people have different requirements. It depends on your thought processes and personality. We understand important things and potential compromises differently. Needs are basic requirements that cannot be ignored or compromised. Desires, on the other hand, can be left behind if the situation demands. You need to make a clear distinction between what your necessities are and which items you would be better off classifying as desires. Remember, no matter how many desires you leave unfulfilled now, they can be worked on later. A pool can be added after a promotion or two. Maybe you don’t like the color of the walls or the window frames; renovation may be a hassle, but it’s always an option for later. Paint color is rarely a need, but having a garage if you plan to run an auto-mechanic business out of it is.

A NOTE ABOUT PETS Consider your pets when home-shopping. Homebuyers who are pet owners have special requirements they must meet for their pets. A third (33%) of millennial-aged Americans (ages 18 to 36) who purchased their first home say the

desire to have a better space or yard for a dog influenced their decision to purchase their first home, according to a survey conducted online by Harris Poll on behalf of SunTrust Mortgage. Dogs ranked among the top three motivators for first-time home purchasers and were cited by more millennials than marriage/upcoming marriage (25%), or the birth/expected birth of a child (19%). It is essential that the neighborhood in which you are going to buy a house have no restrictions on pets. Do you raise American Staffordshire Terriers?There are cities that ban this breed— they’re better known as pit bulls. Goats? Vietnamese pigs? Do you love to always have fresh eggs from your own chickens? Include your animals in location planning. Some pet owners prioritize wood or other durable flooring, not wanting to risk pet damage or odors that might be a greater risk with carpeting. A fenced backyard of appropriate size is on the needs list for many pet-owning house buyers. Consider the arrangement of rooms and the structure of the house as well to make sure it is suitable for your pets. Traffic in the area may be another checklist item. Pet services such as veterinary, grooming, and exercising should be conveniently accessible nearby. LOCATION, LOCATION, LOCATION! You must make sure to be in a neighborhood that offers the closest possible match to the kind of lifestyle that you want. Trulia recently conducted a survey with Harris Interactive, and the real-estate site found 84% of Americans said the neighborhood would be equally important or even more important than the house itself if they were searching for a new home.

Location is so important that people are willing to give up “must-have” features to buy into their desired neighborhood — 72% would forget about a pool, 55% would lose a finished basement, and 33% would accept less square footage. What matters is living in a safe place with good schools. According to Trulia, 69% of buyers would drive through the neighborhood during different times of day to determine if the neighborhood was the right fit. You can’t go to buy a home without choosing a location where you would like to live. Probably the most significant decision when buying a home is where it is. Location influences nearly every part of your everyday life. Your home does not exist in a bubble. It’s part of a bigger community. It is important to find a neighborhood or area that suits your needs. Do you want the peace of a secluded woods or the energy of a bustling city center? Do research before starting your search. Drive through the area and see if all the stores, activities, and features you want are there. Eat at local restaurants and walk through a nearby park. As price is mainly based on location and condition of the property, when someone starts looking for their house, it is important to consider the location and how far it is from schools, shopping areas, and other facilities. Home means comfort, and comfort can’t come if the location is not suitable. • • •

CHAPTER 3

GETTING THAT FIRST HOME LOAN Venturing into the housing market can be intimidating for anyone. Since the housing market crashed in 2007, the road to recovery has been rather uneven. This includes very tight lending, new requirements, and buyers held back by increasingly strict lending standards. There are signs of improvement in the housingmarket, though. Banks are relaxing previously strictminimumrequirements, and lenders are offering mortgages with down payments at lower rates. This may very well be a good time to consider jumping into themarket. With the housingmarket heating up and consumers ready to buy a home, it is time to beginpreparing for the road that lies ahead of you. THE CRITICAL IMPORTANCE OF A GOOD CREDIT SCORE Your credit health is the most important factor in deciding what interest rate youwill pay on yourmortgage, and the difference could be substantial. Your credit rating’s impact is so significant that the difference could be in the thousands of dollars, just from a few points on your credit score. Consider this example. Let us take $178,500 as the price of a home. Two buyers buy at that price and both take a 30-year fixedmortgage.They both put 20% down. One buyer has a low credit score of 620, while the other has a higher score of 760. The one with the poor credit score will end up paying an interest rate as much as 3.5% to 5% higher. This difference could translate into hundreds of dollars per month in mortgage interest payments and a difference of $59,000 or more over a mortgage’s lifetime. The factors used to calculate an individual’s credit score are credit payment history, current debts, length of credit history, credit type mix, and frequency of applications for new credit. The different scoring systems

are based on different criteria, weighted differently, so the three major credit bureaus in the U.S. (Equifax, TransUnion, and Experian) may produce different scores for an individual, even though the scores are based on the same credit report information. Your current credit score is a huge issue in determining if now is a good time to house shop. Having a good credit score before you take on a mortgage is an important factor. A SHORT GUIDE TO CREDIT HEALTH We are increasingly dependent on credit; therefore, it is necessary that you have a good understanding of personal credit reports and your credit score before beginning the process of buying a home. When you apply for credit (i.e., a mortgage, credit card, or utility service), your credit score is checked. A credit score in the 500s is poor, while one in the 800s is excellent. Depending on your credit score, lenders will determine what risk you pose. Increased credit risk as shown by a low credit scoremeans that a risk factor is added to the price at which money is lent. If you have a poorer credit score, lenders will lend you money at a higher interest rate than one paid by someone with a better credit score. Below a certain score, lenders will not even deal with you. Here is a short guide to help ensure that your credit is in good shape before you jump into the mortgage market. ♥ Monitor and analyze your credit history. With your credit score being such a crucial aspect of the final approval on a mortgage, it is important to have a current idea of how your score is going to affect you. Keep a tab on your score well in advance. This will help you to have an accurate estimate of the rate that you can expect. If your credit score is good, it will help you get approval. Take this opportunity to find out areas where your credit history could use improvement, and take steps to make sure those improvements happen.

♥ Report errors and inconsistencies. A study by the Federal Trade Commission (FTC) stated that one out of every four consumers had errors in their credit reports that were significantly affecting their scores. It also revealed that 5% of consumers found errors that — if left unresolved — would have led them to pay significantly higher amounts for mortgages and loans. Do not let errors on your report make you pay more than you should. Make sure you pull and carefully check the three credit bureau reports, and be sure to dispute any errors that would affect your score such as wrong credit limits or incorrect accounts. ♥ Pay off outstanding accounts. Lenders and underwriters of your mortgage will want some certainty that you are a trustworthy buyer who will be able to make payments on time. This means that having any delinquent accounts or outstanding discrepancies on your credit report may hurt your chances of approval at the best interest rates. Before applying, try to clear any such accounts that are hurting your score.

♥ Decrease the percentage of your income that goes into paying debts (your debt-to-income ratio). According toBank of America, keeping your debt at a manageable level is a requirement of good financial health. Your debt-to-income ratio compares yourmonthly debt expenses to your monthly gross income. To calculate your ratio, add up the payments youmake toward debt during amonth. That includes yourmonthly credit card payments, car loans, other debts (such as payday loans or investment loans) and housing expenses — either rent or the costs for your mortgage principal, plus interest, property taxes and insurance (PITI — Principal, Interest, Tax, and Insurance) and any homeowner association fees. Next, divide your monthly debt payments by your monthly gross income — your income before taxes are deducted — to get your ratio. (Your ratio is often multiplied by 100 to show it as a percentage.) For example, if you pay $400 on credit cards, $200 on car loans and $7,400 in rent, your total monthly debt commitment is $8,000. If youmake $300,000 a year, yourmonthly gross income is $300,000 divided by 12months, or $25,000. Your debt-to-income ratio is $8,000 divided by $25,000, which works out to 0.32, or 32 percent. While the preferred maximum varies from lender to lender, it’s often around 36 percent. ♥ Beware of applying for credit. You want your credit score as high as possible when applying for a mortgage. Thus, you should try to avoid getting more credit, especially when your underwriter is deciding on your mortgage. Every credit application you fill out during this time could lead to an inquiry that might significantly decrease your score. ♥ Keep your credit clean before purchasing a home. When it comes to your credit and purchasing a home, you must be extremely careful how you handle your money. One wrong move and you can wave goodbye to your new home. In the case of purchasing a new home through an application for a mortgage, it’s best to wait before taking out any credit cards or applying for car loans. If it’s impossible to wait, make sure you speak to your loan officer or mortgage broker for some advice. You do not want to risk losing your home loan.

TIPS TO BE PREPARED

When it comes to taking out a home loan with a mortgage broker, you are going to need to be prepared. This means you will need to produce many documents, beginning with tax returns from at least three years before. Lenders will also want to see monthly bank statements, as well as proof of your income and all debts you may have. It’s also a good idea to have sources for any big ongoing deposits you may have.

If youhave family or friendsmaking a downpayment for you, it is important to have a written “gift letter” to document such information for your lender. Otherwise, the amount will be considered a loan and included in your financial analysis. You will needmoney for the down payment, closing costs, at least a year’s worth of taxes, and insurance payments. It is also recommended that you have extra cash because mortgage lenders will want to ensure that you have an adequate reserve. This is in case something in the home breaks and needs to be replaced, or if you lose your job and needmoney tomake payments while you look for new employment. Multiple financial experts have agreed the general rule of thumb for a down payment is around 20%, but you are able to do it with as little as 3.5% in the case of Federal Housing Administrationmortgages. Aconventionalmortgagewith aVA loan, which is available to veterans of the military, is around 5%.

Keep inmind that if you are paying less on the down payment, youwill be paying more monthly. This also includes the private mortgage insurance youwill need to pay, which is known as themortgage insurance premium. The mortgage insurance premium only applies, however, if your down payment is less than 20%. One thing you should keep inmind is that improving your credit scorewill not happen overnight. It could take quite some time. It is essential that you begin keeping your credit score in check themoment you start thinking of buying your home. By keeping your credit score at a good level, you will not have to worry about paying extra interest on your house. • • •

CHAPTER 4

FIRST-TIME HOMEBUYER PROGRAMS

According to the Census Bureau, 67% of Americans own their homes. That still leaves a huge number of people who cannot buy their own houses, often because they can’t afford the closing costs or can’t meet the down payment requirements of residential loans. The U.S. Department of Housing and Urban Development (HUD) provides billions of dollars every year to housing grants, turning the homeownership dream into reality. If you are buying a home for the first time, you can file for a buyer grant. There are national, state, and local programs and grants available to first-time homebuyers. These programs and subsidies can help cover portions of acquisition costs, including the down payment, and allow buyers to get a higher percentage of loans to finance. GRANTS FOR FIRST-TIME HOMEBUYERS Grants can be just as important as loans when buying your first house. First-time grants for homebuyers can be a significant source of funding, and unlike a loan or a debt, a grant will not have to be repaid. Often these programs are focused on areas where the government wants to encourage the revitalization of a community. This makes “urban homesteading” a viable and less expensive option for the first-time buyer. These grants are a boon for both homebuyers and the community. Most grants help contend with down payments or the costs of closing, but there are also programs that provide funds for other purposes in the process of buying a house. Many of these programs offer loans that do not have to be repaid, a very helpful thing for a first-time homebuyer, or one who has all the elements of a successful homebuyer but needs down payment assistance.

Given the lower requirements for down payment, FHA loans are a natural choice among the many down payment assistance programs that are available to help you on your way to buying a home, though they do have their own strengths and weaknesses. Most federal grants cater to the first-time homebuyer, and they are intended to help those individuals get started towards homeownership, but these grants should not be expected to cover a large percentage of the new home’s cost. Most cover less than 10% of the home’s value, or can be expected to only help pay for certain expenses such as closing costs. For example, down payment with an FHA loan is 3.5% of the cost of the home. Current FHA loan guidelines allow for the down payment portion of your home loan to come from several different places —a gift, personal savings, tax returns, and down payment assistance programs. Down payment assistance programs are funded at the city, county, and state levels, and due to this funding the assistance programs are ever- changing. Each program operates on its own budget, and operates with its own set of requirements. Credit score, income levels, and other factors will influence your eligibility for down payment assistance programs. Since homebuyer grants are meant to be used towards the purchase of a new home, there are qualifying rules for these funds. Generally, grants will not be given to anyone that cannot qualify for a mortgage. Finally, all federal grant programs aimed at first time homebuyers will require the individual to attend a HUD-approved house counseling class. These classes help to prepare individuals for homeownership by assisting them in the process of getting their finances in order. By doing so, these individuals stand a greater chance of qualifying for a mortgage. For example, simple courses in home economics or household budgeting are important to the financial success of the individual, and achieving the grant program’s goals. Different states have different programs and conditions for home buying grants. The one thing they have in common is that all fifty states have explicit grants for first-time homebuyers. Check what grants are available in the community you are planning to move to.

There are steps to follow when applying for a buyer grant. First, find a homebuyer grant that fits you. Then, check the requirements of that grant program. Finally, find an approved lender and fill out all the application forms correctly. The HUD website is a great resource for buying a home, whether it’s your first or your tenth. (For specific HUD programs, you can go to portal.hud.gov and access their Resources section or search for a specific kind of program with the Search bar.) PENALTY-FREE IRA WITHDRAWAL FOR FIRST-TIMERS First-time homebuyers are eligible to take $10,000 during their lifetime out of their Individual Retirement Accounts (IRAs) without paying the 10% penalty for early withdrawal. If yours is a traditional IRA, you will have to pay income tax on the money withdrawn. Roth IRA accounts are not subject to additional taxes as they are funded with money that has been taxed. Since the $10,000 lifetime amount earmarked for penalty-free withdrawal is for each individual, a couple could collectively withdraw $20,000 to pay for their first home. The money must be used within 120 days, though, or it becomes subject to the normal 10% penalty. OTHER HOMEOWNER TAX BREAKS s s TheMortgage InterestDeduction. This is one of themost beneficial tax breaks that homebuyers can take advantage of, first-time buyer or otherwise. The IRS allows you to deduct from your taxable income the interest you pay to your lender. Home mortgage interest is one of the largest deductions for those who itemize. Lenders will report your mortgage interest on a 1098 form sent out annually. The Mortgage Interest Deduction is valid for loans up to $750,000. Homebuyers receive a large benefit in the first years after buying, as the first repayments have the highest interest. To claim the Mortgage Interest Deductionbenefit, a homebuyerwill have to file an itemized tax return. s s Mortgage credit certification. The Mortgage Credit Certification is another programthat helps thousands of first-time homebuyers secure a tax break.This IRS programis aimed at helping lower-income groups afford their first home.TheMCCprogramis designed tooffset aportion of themortgage interest on a newmortgage tohelphomebuyers qualify for a loan. Because it is a tax credit and not a tax deduction, mortgage

lenders will oftenuse the estimated amount of the credit on amonthly basis as additional income to help the potential borrower qualify for the loan. Depending on the price at which you purchased your home, you can get back up to 30% of the interest you pay as tax credit. The program is administered by local authorities and can vary according to the state you live in. To qualify for this tax credit, you will need a Mortgage Credit Certificate issued by the local government. s s Home improvements. Improving your home can not only add to its livability and comfort, it can also earn you tax deductions in multiple ways. You can use a home-improvement loan to finance the cost of improvements in your home, as these loans also qualify for mortgage interest deductions. The interest on a home-improvement loan is deductible in full, up to a sum of $100,000 in debt. Keep track of home improvement costs. When you go to sell the property, if the selling price of your home is more than you spent to procure it, the extra amount will be considered taxable. You can add the improvement cost to the value of your property to reduce the value of this taxable income by factoring in the home improvement costs. This can help you save money in taxes following the sale. s s Home office deduction. If you work from home, the amount of space in your home that is dedicated towards business activities is tax-deductible. This deduction will include loan interest, insurance amount, other utilities, and repairs. However, there are certain guidelines for taking advantage of this deduction, so check with your professional tax preparer. s s Home energy tax credits. The IRS rewards homeowners who make efforts to create eco-friendly homes.The Residential Energy Efficiency PropertyCredit can cover the costs that are spent towardsmaking the home more energy efficient. Homeowners can save around 20-30% of the costs incurred for installing energy efficient appliances. An important factor is that it counts as a tax credit, which means it will reduce your tax bill directly. To apply for this tax credit, youmust invest in appliances that harness energy from renewable sources. Examples of these sources are solar panels, wind turbines, fuel cells, etc. • • •

CHAPTER 5

COMMON FIRST-TIME MISTAKES If you do decide that it makes sense for you to consider the investment of owning your own house instead of renting— congratulations! Home- hunting is exciting, exhausting, and anxiety-provoking, all with good reason. Unfortunately, many people make mistakes that prevent them from reaching their goal. Learn from these tips to avoid making costly errors that could put a hold on that “sold” sign. NOT KNOWING YOUR BUDGET

Not knowing what you can afford is the wrong way to go into home buying. Even if you can get a mortgage on a place you really should not afford, you will be “house poor” and/or live in great debt for a long time to come. We learned from the subprime mortgage fiasco that what the bank says you can afford and what you know you can afford or are

comfortable with paying are not necessarily the same. You might be able to eke out the monthly payment on that big old Victorian, but can you afford to furnish it? Perhaps the cute little Tudor is more appropriate. Ensure you have a complete and accurate budget. List all your monthly expenses — excluding rent, but including vehicle costs, student loan payments, credit card payments, groceries, health insurance, retirement savings, general savings, recreation (e.g., the gym), fees, and so on. Be comprehensive and do not overlook major expenses that only occur once a year, like insurance premiums paid annually or annual vacations, or minor ones that come up more frequently and quietly pile up in the background.

Subtract this total from your take-home pay and you’ll know howmuch you can really spend on your new home each month. When calculating this figure use a mortgage calculator to research current interest rates. This will give you an estimate of what your mortgage payments will be. You may even realize that you genuinely cannot afford the home that you desire and that you need to work on reducing your monthly expenses or increasing your income before you even start looking. NOT GETTING A PRE-APPROVED HOME LOAN Some people are anxious to shop for a house and want to do it quickly, before they are financially able to afford it. If you have already started talking to sellers before having a hard talk with home loan lenders, you are making a mistake. It should come as no surprise, but not many sellers will want to work with you if you promise them a certain amount and then can’t fulfill that promise. Your assessment of what you think you can afford and the amount the bank is willing to lend you may not agree, especially if you have poor credit or unstable income. Ensure pre-approval for a loan before placing an offer. If you don’t, you’ll be wasting the seller’s time, the agent’s time, and your own time if you enter into a contract and then discover the bank won’t lend you what you need, or that it’s only willing to give you a mortgage that you can’t or won’t accept. DISREGARDING HIDDEN COSTS This is another commonmistake that many first-time homebuyers make. If you neglect to prepare for hidden fees, you might be in for a surprise. Closing costs are a good example of hidden fees, as they usually include several fees that cover final housekeeping matters. Once you’re

a homeowner, you’ll have additional expenses on top of your monthly payment. You’ll be responsible for paying property taxes, insuring your home against disasters, and making whatever repairs the house needs (which will occasionally include expensive items like a new roof or a new furnace).

If you’re interested in purchasing a condo, you’ll have to paymaintenance costs monthly regardless of whether anything needs fixing because you’ll be part of a homeowner’s association, which collects a couple of hundred dollars a month from the owners of each unit in the building in the form of condominiumfees. Before signing the homebuyer’s agreement, it would be wise on your part to ferret out any and all hidden fees and incorporate them into your budget. NOT KNOWING YOUR CREDIT SCORE If you apply for a mortgage loan without checking your credit score, you could end up paying a lot more than you expected. It is best to perform a credit check beforehand. Take special note of the information regarding the importance of good credit in applying for a home loan and take all necessary steps to repair credit problems prior to home shopping. DISREGARDING LOCAL HOUSING MARKET TRENDS Like other financial markets, the housing market fluctuates over time. Sometimes it favors buyers, and sometimes it favors sellers. This can change dramatically over a three- to six-month period. A number of factors affect housingmarketing trends, including the ratio between supply and demand, interest rates, and the overall condition of the economy. It’s important that you consider how the housing market changes in your ideal location, as home prices vary from one location to another. Stay alert to comparable sales (comps) in the area. If they sell for below listing price, it is a buyers’ market. If they sell above listing price, it is a seller’s market.This information can be important whenmaking offers, allowing you to calibrate your proposal to better suit the market and — if you’re lucky — your budget. NOT BEING REPRESENTED BY A BUYER’S AGENT You can browse without an agent, but once you are considering seriously looking at a house, engage a real estate agent. Do not rely on the seller’s agent to represent you. In fact, it would be fair to say you should never

walk into an open house without having an agent. The listing agent is the seller’s representative, is paid a commission on the sale price, and has the seller’s interests in mind. A buyer’s agent, on the other hand, is paid from a commission that is split with the seller’s agent. All-in- all, it’s pointlessly risky to negotiate conditions and sale price without proper professional representation on your side. NOT CONDUCTING A PROFESSIONAL HOME INSPECTION It can be a costly mistake to rely on the seller to inform you about house problems. Prior to closing on the sale, you need to know the property’s specific condition. Any sales agreement must be conditional on the satisfactory results of a complete and comprehensive home inspection by a reputable and qualified home inspector. This will disclose structural and systems issues or weaknesses that can run the gamut fromplumbing, gas, and electrical problems to full-blown structural integrity problems in roofing, walls, or foundation. COMPROMISING ON YOUR NEEDS While compromises inmeeting your dream-home desires are necessary in a first-home purchase, do not compromise on your needs. You can do without the living room fireplace or swimming pool; however, don’t accept a two-bedroom home when you are planning to have children and will need three bedrooms. On the other hand, use your vision. Even if you hate the wall colors, but cannot afford to renovate immediately, it might be worth it to live with them temporarily in exchange for a house you can afford. If the home meets your needs in the location and size, don’t let lesser physical imperfections overpower your perspective. RELYING ON ONLINE SERVICES ONLY Now that many real estate transaction services are obtainable at the click of the mouse, many people have become too dependent on them. While it is true that loans can be obtained online and houses can be bought as well, failure to establish personal touch with lenders or home sellers could present costly misunderstandings in future or put you at a bargaining disadvantage. It might feel more convenient and less stressful to go through as much of the process as possible online, but you may

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