- 1 Key Terms
- 2 Summary of Steps
- 3 Homebuying Team
- 4 Costs of Homeownership
Chapter 1: Advantages and Disadvantages of Homeownership
- Creditworthiness: Whether your finances and payment history are strong enough for a bank or other lender to loan you money.
- Affordability: Whether the loan payments, plus your other expenses, fit within your income.
- Foreclosure: A legal proceeding in which your home is usually sold and the money from the sale pays all or part of the amount that you owe the lender.
Chapter 2: How Do You Buy A Home?
- Fixed-rate loan: A loan with an interest rate that never changes. This is different from an adjustable-rate loan, which has an interest rate that may go up or down, resulting in a higher or lower monthly payment. For most first-time homebuyers, fixed-rate loans are preferred.
- Principal: When you borrow money from a bank or another lender, the amount of money you borrow is called the loan "principal." You repay a portion of the principal each month when you make your mortgage payment.
- Interest: This is what the bank or other lender charges you to borrow money. It is usually a percentage of the amount that you borrow. You will hear people talk about getting a "five percent loan" or "seven percent loan," or some other amount. This means that the lender is charging them five or seven percent to borrow money.
- Equity: This is the difference between how much your home is worth and how much you owe on your loan. For example, if your home is worth $100,000 and you owe the bank $90,000, your "equity" is $10,000.
- Loan Product: There are many different loan products, or types. Some loans have adjustable, or changing, interest rates; others have rates that do not change. Some loans are repayable over 15 years, others over 20 years, and some over 30 years.
- Pre-approval: A guarantee that a lender will loan a potential buyer a fixed amount as long as certain conditions are met.
- Appraise: A professional assessment of the fair market value of a property, based on the sale of similar properties in the area in the recent past.
- Real estate agent: A person who is licensed by the state to help buyers find a home they want, and to help owners sell their property. The real estate agent may work for the buyer, the seller or both.
- Offer to Purchase/Purchase Offer: A legal contract in which you offer to buy the home from the seller for a specific dollar amount, based on certain conditions. This usually includes the date by which you will buy the home.
- Earnest money: Earnest money is money that you send with your written offer to purchase, which shows your seriousness about buying the home. It is similar to a deposit. In some cases, if you do not buy the home, you can get your earnest money back. If you do buy the home, the amount of earnest money you have given will be credited toward the purchase price.
- Contingency: When one thing will happen as a result of something else. When you make a written offer to buy a home, you will probably include a condition such as being able to get a mortgage loan that you can afford. That condition is called a "contingency." If interest rates suddenly go up and you cannot find a loan you can afford, including this kind of contingency lets you cancel the contract to purchase.
- Loan rates and terms: The loan rate is the interest rate, which is how much you are paying the lender to borrow money. The rate can be fixed (never changes), adjustable (can go up or down), or sometimes a combination of the two--for example, a fixed rate for the first ten years, then changing based on interest rates at that point. The term of the loan is how many years you have to pay the money back.
- Escrow: Money that is held by a neutral third party (often the attorney) to be given to the seller at the closing, once all conditions of the purchase contract have been met.
- Chain of Title - The record of who has owned the property in the past, up to the present owner.
Chapter Three: Costs of Homeownership
- Principal: When you borrow money from a bank or another lender, the amount of money you borrow is called the loan "principal." You pay back part of the principal each month when you make your mortgage payment.
- Interest: This is an amount the bank or other lender charges you to borrow money. It is usually a percentage of the amount that you borrow. You will hear people talk about getting a "five percent loan" or "seven percent loan," or some other amount. This means the lender is charging them five or seven percent to borrow money. You pay interest on what you have borrowed each month when you make your mortgage payment.
- Taxes: You pay taxes on your home each year. The taxes are based on how much your land and home are worth.
- Insurance: Homeowner's insurance is collected by the lender and the amount of coverage is based on the worth of your home.
- Upfront Costs: Upfront costs are things that you will pay only one time--either before you buy your home, or at the closing. These include the down * payment, closing costs, and the costs of moving and settling into your new home.
- Ongoing Costs: You will also have several ongoing costs. These include utility bills, maintenance, and repair costs.
Summary of Steps
- Prepare for homeownership.
- Determine how much you can afford to spend.
- Get your loan pre-approved.
- Decide what kind of home you want and need.
- Shop for a home.
- Make an offer.
- Get a professional home inspection.
- Apply for a mortgage loan.
- Buy insurance and get additional inspections.
- Close the loan.
The Real Estate Agent
Real estate agents are approved (licensed) by the state and have been specially trained to sell houses, other buildings, and land. Real estate agents earn their living by helping match buyers and sellers. They get paid a portion of the money the seller receives from selling the home. Sometimes, you and the seller may work with the same real estate agent. Either way, the agent is legally required to be honest and fair with both of you.
When someone is trying to sell property, he usually hires a real estate agent. There is a formal contract. The agent is responsible for "listing" the property. This includes advertising the property. The listing agent is working for the seller.
When you are trying to buy a home, you usually hire a real estate agent too. You also sign a formal contract. The agent is working for you, the buyer, to help you find a home you like and can afford. The buyer's agent usually receives a portion of the money the seller is paying to sell the home. That money is called a commission. Because the listing agent and buying agent split the commission, there is usually no cost to you.
The loan to help you buy your house is called a mortgage loan. Nearly everyone needs a loan to buy a house because they are so expensive. Many kinds of companies can loan you money, and all are called "lenders." A lender can be a bank, a savings and loan, a credit union, a mortgage company, a government agency, or even a private individual.
The lawyer (also called an attorney) may specialize in real estate law. He or she can give you valuable help in buying a home. Some states require that the attorney write the real estate contract, research who has owned the property in the past (called a title search), and facilitate the actual closing.
The Escrow Officer
As we learned before, from the time you offer to purchase the house to the time of the closing, your contract is in escrow. Lots of things happen during escrow to make sure that you buy the house on time and that both you and the seller do the things you promised to do. The person who manages the escrow is called the escrow officer. He or she works separately from both you and the seller and keeps the original purchase contract and other documents. The escrow officer also holds onto the earnest money and makes sure everyone involved in the sale is doing their jobs. The escrow officer is paid a fee at the closing. Half of the fee is paid by you as the buyer and half is paid by the seller.
Title Insurance Officer
Title is another word for owning the property. When you buy a home, you want someone to look at who has owned it in the past. The person who does this is usually the title insurance officer. The history of who has owned the house before is called the chain of title. The title officer looks at deeds and other documents to see who has owned the house before and to make sure that the person you are buying it from really has the right to sell it to you. The title officer will write a report that shows who owned the house. The report can also give you other important information about the property. The title officer works for an insurance company, which sells insurance to guarantee that the title report is correct and that you can rely on it. All lenders require the buyer to pay for an insurance policy so that if there is a problem, the insurance company pays the lender up to the amount of money that you owe. You can also buy an owner's title insurance policy to cover your part--the difference in what the house is worth and what you owe the lender. In some areas, the seller pays for the owner's policy. In others, you have to pay for it yourself.
The Housing Inspector
A housing inspector is the professional who checks your home. He or she will look at the walls, floors and roof (structure) as well as inspect the heating and cooling, electrical and plumbing systems. The inspector will write a report describing any major problems. You should go with the inspector when he or she looks at the house, especially if this is the first time you have bought a home. The inspector can point out important things such as where to cut off the water supply if there is a leak, or where the electric box is located. Inspectors can also give you good advice on how to maintain things, such as how to change the furnace filter or clean out the gutters.
When you apply for a loan, the lender you are working with will hire someone to estimate the value of the home you want to buy. These people are called appraisers. Their job is to decide what the home is worth, called the "fair market value." They do this by comparing the home you want to buy with others like it that have sold recently in the same area. You do not work directly with the appraiser.
A surveyor is someone who checks the measurements of the property and land around it. They are licensed professionals. Every piece of property has a legal description that describes the property lines. The survey tells you how big the property is. It also tells you if there are any easements or encroachments. An easement is giving someone who does not own the property the right to use it for a specific reason. An example would be giving the water company an easement so workers can put water lines along the edge of the property or take care of lines that are already there. An encroachment is when someone has put something on the property that you plan to buy. An example of an encroachment would be if a neighbor built a garage without checking the property line, and it was a foot over the line and partly on the property you want to buy.
The Insurance Agent
Many people have car or life insurance. When you buy your home, you will need homeowner's insurance. Usually the same company that has your car or life insurance can sell you homeowner's insurance. The homeowner's insurance protects you from casualty and liability, which you learned about before. A fire or similar event is "casualty". Someone getting hurt on your property is called "liability".
The Housing Counselor
Your housing counselor is someone who works for NeighborWorks America or another non-profit company. The counselor has received special training to help you learn the steps involved in buying a home. Housing counselors can also help you get your credit report. If there are problems on your credit report, they can give you ideas about how you can fix them. Usually the housing counselor can meet with you privately to talk about any credit problems. They are there to help you get past any problems you encounter in buying a home.
Costs of Homeownership
The principal is the part that goes toward paying back the money you borrowed. Of the four parts of the house payment, only the principal amount of your payment goes to repay the money you borrowed.
The interest is the part that pays the lender for loaning you money. When the lender loans you money, they make money by charging interest. You end up paying the lender back more than you originally borrowed.
When you own your home, you pay taxes on it each year. The taxes are based on how much your home and land are worth. Your tax bill includes any improvements, such as a garage. The taxes are used to help support things like your school system and libraries. Your lender will figure out about how much you will owe each year. A lender will ask you to pay one-twelfth of that amount each month and will put it in a separate account called an "escrow" account. When the property tax bill is due, the lender pays it for you. Since your taxes may go up a little each year, the amount the lender collects each month may go up a little as well.
When you own your home, you will need to pay for homeowner's insurance each year. Just like with the property taxes, the lender will figure out about how much this will cost each year. It will collect one-twelfth each month and pay the bill for you when it is due. This money is put into the escrow account just like the property taxes, and if your insurance goes up a little each year, your monthly cost may as well.
This is important: Not all lenders will ask you to pay a part of your taxes and insurance each month. Sometimes they will only want you to pay the principal and interest. If that is the case, you are responsible for paying the taxes and insurance yourself. If your lender does not have you paying the taxes and insurance a little each month, ask them how much you should put into your own savings account so you can cover the bills when they are due. Make sure you know before you buy your home whether your house payment includes all four things. Be sure to plan ahead. The taxes and insurance can be a lot of money each month - usually $100 to $250 - so make sure you know before you sign all of the loan paperwork.
Initial or Upfront Costs: Upfront costs are things you pay before you get your loan or when you close your loan. These can include your down payment, the closing costs that you learned about earlier, and the money it takes to move into your new home.
The down payment is your first investment in your home. The lender decides the least amount you can pay for your down payment, which is usually 3 to 5 percent of the sales price. If you have more money, you can make a bigger down payment. If you do, that will reduce how much money you have to borrow (and pay back). That will then reduce how much you have to pay the lender each month.
This term can be confusing. You pay some of the closing costs ahead of time and get credit for them at the closing. These costs include things such as your credit report fee or the appraisal. Other costs you don't have to pay until the closing takes place. These can include the fee to your lender to give you a loan or the cost of a termite inspection. Depending on the kind of loan you choose, closing costs are usually about 2 to 7 percent of the house price.
Escrows and PrePaids
When you close your loan, your lender will usually want two to three months payment upfront for your taxes and insurance. Lenders do this to set up your escrow account. Your lender may also want you to pay "prepaid" costs such as interim interest or different kinds of insurance costs. "Prepaids" are things you are paying for in advance. If you rented a home and your landlord wanted the first and last month's rent up front, the last month's rent is a lot like a "prepaid." One of the prepaid items is interim interest. If you buy your house on the 15th of the month and your payment is due on the first, you have to pay your lender interest on the money you borrowed for the days before your loan payments start. Another prepaid is insurance. This can be the hazard insurance (the casualty and liability you studied before). Sometimes the lender wants you to pay a year in advance. If you have mortgage insurance, the lender may want you to pay a month or two upfront.
A reserve account is like a savings account. Your lender may want you to have a "reserve." A reserve is money that you have saved to use in an emergency or to fix things. You put the money into your own savings account. Your lender may ask you to have enough savings to equal two months of your house payment. You should always have this kind of a savings account even if your lender does not require it.
You may be able to move all of your things or you may need to hire someone. Be sure to think about things that you will need to pay for like moving or utility deposits. Here are some things to think about:
- Van rental or moving company fee
- Changing the locks on doors and installing window bolts and smoke detectors
- Deposits and start-up fees for utilities, phone, cable, trash removal and other services
- Immediate repairs or work your home may need, such as cleaning or painting
- New appliances
- Equipment, such as lawn mowers or hoses
- Decorating or furniture
When you rented, your rent may or may not have included utilities. When you buy your home, you are responsible for paying all of the utilities, which are part of your ongoing costs. This can include things like oil, gas, electricity, water, sewer and garbage. The cost may be more than when you rented, so be sure to check. When you buy your home, you will also be responsible for fixing things if they break. Remember to save some money for this kind of an emergency.