3.The Path to Ownership

First Steps to Ownership

It’s Never Too Early to Start: When you’re planning on buying a new home, start your research process as far in advance as possible. Take notes on properties of interest, including how long they’re on the market and what they sell for. Check out potential neighborhoods or cities you’re drawn to.

What Can You Really Afford to Spend on a Home? Knowing how much house you can realistically afford can save you a lot of financial heartache in the end. The bank or mortgage lender can provide you with two options:

Pre-qualification: this will provide you with a general price range of houses you can go shopping for

Pre-approval: establishes an exact loan amount of which you’ll be able to borrow. You’ll then receive a letter from the bank/mortgage lender stating you have financing in place, which means you’re an interested and serious buyer.

Important Things to Consider

How’s the Economy? If interest rates are falling, it may be a good time to purchase a home to take advantage of lower rates. In the same token, if interest rates are rising, it may make sense to lock in a mortgage rate before the interest becomes unaffordable. An example of mortgage interest variance by Consumerfinance.gov shows that the principal and interest payment for each $100,000 of a 30-year mortgage will cost $421.60 monthly at 3%; $536.82 at 5% and $665.30 at 7% interest.

Looking for a DIY? If you’re looking at purchasing a home to which  you can make improvements, don’t overestimate your skills as a handyman. If you have a reputable contractor in mind and are prepared to pay for their expertise, a fixer-upper could be a great option but it needs to be financially feasible for you to afford. If the kitchen or bathrooms require major repairs or the inspection reveals issues like rot, termites or a weak foundation, will it really be worth your time, money or inconvenience while you wait as they’re being upgraded? Know the limits of what you and your family are willing to endure during a renovation process.

The Five-Year Rule. Do you plan on living in your new home, possibly in a new city, permanently? As a general rule of thumb, financial experts encourage new homeowners to keep their new properties for at least 5 years before considering selling. Why? It’s based on profit/loss, appreciation of your home’s value, and the overall recouping of your investment during those initial years of homeownership. The National Association of Realtors states the majority of homeowners remain in their homes for 10 years before considering selling.

When Should You Move? Spring traditionally offers the largest inventory of homes for sale, as many families with children who are going to move seek to do so during the summer to avoid intra-school year disruption.  But there is often ample inventory available during other times of the year, so if you’re open to moving anytime you find the right property, don’t hesitate to begin your search.  A tip from Investopedia.com states “some savvy buyers also like to make offers around holidays, such as Christmas or Easter, hoping that the unusual time, lack of competition, and overall spirit of the season will get a quick deal done at a good price.”

What Are You Willing to Sacrifice? Will your lifestyle change for the better if you purchase a new home, or will you need to give up some much loved personal spending like that daily coffee or a gym membership – and are you prepared to do so? On the flip side, a new neighborhood may provide access to a trendy arts or local music scene you’ve never experienced before. Do your research and know about what you’re personally willing to compromise, think: non-essentials; entertainment; clothes; vacations; or making a home purchase a first priority over buying a vehicle.

Let’s Talk Location

Choosing a Location Is As Important As The Home You Decide To Purchase:  Will the location suit your and your family’s needs both now and for years to come?  There are many things to consider when deciding upon a location for your new home.  What things about a location or neighborhood are most important to you and your family?  Does an urban, suburban or rural location best meet your needs?  How long of a commute is acceptable to you?  Do you need highway access?  Is taking public transportation part of your plan?  How close to public transportation do you need to be?  Do you have or do you plan on having children?  What are their schooling needs?  What amenities do you want to have near your home — shopping, recreation, exercise, etc.?  These are just some of the questions to ask yourself when you begin to think about where to look for your new home.  Selecting your new home can be an emotional experience and filtering through all of the decision points can be overwhelming, but doing so is worth the effort.  Because each homebuyer will have a different list of considerations and will likely assign different levels of importance to them, it is a good idea to create a decision matrix through which you can filter each property you consider.  You can make a relatively simple spreadsheet, listing on one axis the attributes you desire in your new home and on the other the homes you’re considering.  Then assign a point value from 1 to 10 to each home on each of the attributes in the matrix.  The home with the highest score should be the one that best meets your needs.  Even if it is not the home you ultimately select, going through this decision-making process can help you make a data-driven decision and avoid the all-too-common pitfall of falling in love with a house that isn’t really a good fit for your needs.   (Note – the best way to compose a matrix is to build the spreadsheet, assign a weight to each attribute. For example, for a particular buyer, school quality might weigh in as an 8 while proximity to highways is weighted at a 3 while for another buyer those weightings might be reversed.

Can You Afford to Live in the City You Want? Besides the housing market, determining factors in choosing a location can include job opportunities/transfer and the city’s cost of living. You’ll also need to factor in property tax rates, state tax, city tax, town tax, school districts, possible HOA and associated fees, and/or accessibility to health care as applicable. Or maybe it’s not a city at all that you’re looking for – maybe your dream property exists in the suburbs, or a larger property with land and room to grow.

Will there be an HOA, POA or CCR?: A Homeowner’s Association (HOA) grants the developer privileged voting rights in governing the association. Usually, the developer transfers ownership of the association to the homeowners after selling a predetermined number of lots. Generally, homebuyers within the purview of a homeowners association must become members, and must obey the restrictions set forth by the association. Most homeowner associations are incorporated, and are subject to state statutes that govern non-profit corporations and homeowner associations. State oversight of homeowner associations is minimal, and it varies from state to state.

A Property Owners Association (POA) is a governing body that encompasses HOAs and COAs. POA fees are combined with HOA or COA fees. Serving as a type of umbrella organization, a regional POA often provides legislative, educational, and networking opportunities for property owners.

Covenants, Conditions and Restrictions (commonly referred to as CCRs) are the written rules and restrictions pertaining to the use of property.

Don’t Take the Realtor’s Word For Granted. While you can no doubt trust your realtor, after visiting your property of choice, do a couple of drive-bys on your own at different times of the day on weekends and weekdays. Where does the sun rise and set? Will you receive the majority of sunshine in your living room or other areas? Is it a quiet neighborhood at night? How’s the parking in the area? How much traffic occurs along the street – is it a shortcut during the rush hours? Is it close to schools, restaurants, and shopping? Is there public transportation nearby?  If you commute by car, drive from the home to your place of employment during the morning rush hour and back during the evening one.  What is that commute like?  Is it one you can live with?

Future Implications:  It is always important to think about the future implications of the home buying decision that you make.  While buying an inexpensive house near a busy road could be a fantastic deal at the time, it also pays to think ahead of what will happen when it comes time to sell your house in the future.  Will that noisy road make your home difficult to sell?  The same goes for a home that backs up to a school.  Some buyers will find that appealing and others may find it a reason to cross your home off of their list of homes to consider. Be aware of neighboring vacant lot zoning codes for potential future development that may impact the value of your home. Keeping potential future buyers in mind is a fundamentally wise idea.

Are Similar Property Values On The Upswing Or Downswing? While all US housing markets are different, are property values in that neighborhood on the rise or the decline? What is the median age of homes in the neighborhood?  Do zoning laws allow for commercial buildings or mixed-use buildings in the area you’re considering?

Don’t Compromise on Location. Buyer’s remorse tends to happen when you don’t get what you really, really want. If at all possible, the preferred location for your home shouldn’t be up for too much of a compromise. If you’ve decided on a specific neighborhood that you absolutely love, do your best to stick to that choice, as anything else could prove disappointing, maybe not at first, but after a few years could be a frustrating experience.  Are you ready to forgo a larger home for a smaller home with room to grow your organic garden? Maybe the city is more of your thing where you’ll be close to public transportation. Being close to nature and walking trails could also be a deciding factor in choosing your new home location.  Moving to a distant suburb may enable you to buy a home at a lower price.  The longer commute will cost you both time with your family and additional costs for gas and car maintenance.

What’s Next?

  • Ensure you have everything on the checklist before you approach the buying process
  • Know your true homeowner buying budget to help avoid any unnecessary dreamer moments should you find the perfect house at the wrong price.
  • Be prepared to ask questions about everything and anything that comes to mind.

Look Into Loan Options

Can you afford to pay cash for your new home? If not, you’ll need to explore your options for obtaining financing.  While looking into loan options can seem like a daunting task, getting a loan to purchase your new home is crucial. Banks, credit unions and mortgage bankers are eager to have your business, but making sure you find the right lender and the right loan terms for you is critical.  Here are some options and ideas to help you do so.

Who Will Lend You Money to Buy a Home? Based on your assets, liabilities, income and credit scores, lenders will establish your ability to pay back any money borrowed. Meeting minimum income, down payment and liquid reserves (funds remaining after your loan closes) requirements, is key to qualifying for a loan for your new home.  Your lender will work with you to help you determine which loan type and program are the best fit for your borrowing needs.  You’ll want to review your options.  Federal Housing Administration (FHA)-insured loans include a mortgage insurance premium paid by you every month for the life of the loan, but offer you the ability to put very little money down to buy your home.  FHA loan size maximums vary geographically, and your lender will be able to tell you whether you qualify for one.  What the mortgage industry calls “conventional loans” are mortgages that conform to the guidelines issued by Freddie Mac and Fannie Mae.  These two government-sponsored enterprises set the standards for mortgages that are at or below a certain size (set by Congress and adjusted every year) and do not have FHA insurance.  Your lender will be able to explain the options available to you in the conventional mortgage space, where you can often make a small down payment, pay a monthly mortgage insurance premium that does not last for the life of your loan or, if you can pay at least 20% of the purchase price with your own funds, avoid mortgage insurance entirely.  If you are a veteran, you’ll want to explore VA financing with your lender.  Under the VA programs, qualifying veterans can obtain home financing with no money down at all.  If the property you’re considering is in a location that qualifies for it, a Department of Agriculture Guaranteed Rural Housing loan might be a good fit for you.  Each program and loan product has features and benefits that will be of different value to different borrowers.  This is why finding a qualified, responsive lender is so important.  Ask friends, family members and your realtor (if you have one) for their recommendations and do some homework.  Check Yelp and Google reviews, and other online rating platforms and services to learn about the experiences other borrowers have had with lenders you are considering.  Financing your home is likely the largest financial transaction of your life to date.  It is worth spending some quality time to find the best lender and best loan program and product for your needs.

An offer to purchase a home is a legal contract, and as with any legal documentation, you’ll need to read the purchase agreement and any/all attachments very carefully, as well as to have your attorney review it before signing.

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