Buying and Owning a House

Buying a house is usually the largest purchase any of us will make. It rarely can be accomplished quickly and easily. And yet, as a country, we are always on the move.  Approximately 6.27 million homes were purchased in 2018, but according to the National Association of Realtors, the typical American home turns over every nine years.

Recent economic upheavals profoundly changed the nature of how American homes traditionally have been bought and sold. In 2005, almost all home sales were transactions between individual buyers and sellers. Sales of repossessed homes held by banks comprised less than 1% of the total.

Just a few years later, the economic meltdown exploded the number of mortgage failures and foreclosures. Short sales — sales of property for less money than is owed — and sales of bank-owned homes soared to 23% of the total. In 2009, 18% of single-family home sales were short sales. That number has steadily declined and is back to less than 1% of home sales.

In fact, in May of 2018, only 9% of homeowners were underwater, a huge drop from the 31% peak reached in 2012.

Despite these changes, the desire to own a home as both a place to live and a financial asset, makes home-buying a significant aspect of our national economy. Most home buyers still purchase their homes in the old-fashioned way, so the following roadmap is intended to help direct you on the typical home-buying journey. Getting a real estate agent, searching for a home, finding a lender, securing a mortgage, closing the sale and then insuring the home are all stops along the way.

The First Steps in Buying a Home

The first step in deciding whether to buy a home is to consider the advantages and disadvantages of owning a home rather than renting one.

You need to think about:

• How much house you can afford to acquire and pay for over time
• What your needs are, as opposed to what you desire
• Whether it is good time to buy — both in your personal life and in the cycle of the housing market
• Consider taking a HUD-Certified Homebuyer Education Course to learn about the home purchase process

Once you decide you do want a house, the real work starts. You need to get prequalified for a loan. Have informal discussions with various lenders who can give you an opinion on whether you are financially ready to buy. Be prepared to alter your plans if the loan experts challenge your notions about what you actually can afford.

Now that you have a general idea of what you can afford, pick your new neighborhood. This involves investigating local schools, local crime and distance from work.  What type of house do you want? Large or small? Old or new? One-story or two? Garage? Big backyard or small? The list can be as long or short as you want to make it.

Then there’s the architectural style and design you prefer, size and type of construction and any extras you’re looking for – a pool, fireplace, and type of appliances. The decisions keep coming. Ultimately, you may figure out that you want – or need – help buying a home. This is where real estate agents come in.

How Much House Can You Afford?

Too many people start the process by looking for a house they really love, and then figuring out how to afford it. That’s doing things backwards.

It should happen the other way around. Determine how much house you can afford, then start looking in neighborhoods that reflect that price range.

There are a lot of ways to determine how much house you can afford, but the easiest might be a mathematical formula that lender’s use to see how much they’re willing to loan you.

The first math formula is called “front-end ratio.” Take your pre-tax annual income, divide that by 12 (number of payments in a year) and multiply that by 28%, (the maximum amount of income that should be dedicated to housing). The number that comes from this is the TOTAL amount that should be spent in a month on housing. That includes principal, interest, property taxes, insurance and PMI (private mortgage insurance) and homeowner’s association dues, if they apply.

For example, if a wife and husband have a combined income of $75,000, divided by 12 equals $6,250, multiplied by 0.28 equals $1,750. That means the maximum amount the couple could afford would $1,750 a month.

The other math formula is called a “back-end ratio” and it involves a little more work. You start by adding all “regular monthly payment” obligations, things like student loan, car loan, credit card spending and child support. This does not include things like the monthly utility, cable or cell phone bill.

The back-end ratio formula starts with your annual pre-tax income, divided by 12, multiplied by 35% and subtract whatever the “regular monthly payments” total.

For that same couple with a $75,000 annual income and regular monthly payments of $600, the math would look like this: $75,000 divided by 12 equals $6,250, multiplied by 0.35, equals $2,187 minus $600 equals $1,587. That means the maximum suggested amount the couple could afford for housing is $1,587.

If nothing else, the front-end and back-end ratios give you a ballpark figure on the most you house could afford.

Choosing a Real Estate Agent or Broker

Armed with the knowledge of your financial limits, you are ready to contact a real estate agent or broker to discuss your plans. Brokers are the legally responsible parties in real estate transactions, while agents act more as salespeople. A real estate agent may have a broker’s license or may work for a broker. Nearly every buyer in the traditional market buys a home through an agent or broker.

It is important to choose your real estate agent with care.  A good agent:

• Has excellent references from family members, friends or (your) co-workers.
• Knows the property values and neighborhoods where you are planning to look.
• Works as an agent full time and has a record of successful sales.
• Understands the buying and selling process and is an expert in the types of properties you are considering.
• Has a personality and style that gives you confidence you will find the right home at the right price.

Shopping for a Mortgage

Once you know what you are looking for and where you want to live, you should line up your funding options before venturing out. Shop around for loan sources. Search the internet, visit your local bank or credit union, and talk to a mortgage broker. In 2018, 88% home buyers borrowed money to get their house.

A good lender:

• Is straightforward and honest.
• Understands the local housing market.
• Knows the mortgage business and will work with you to find the best loan for your situation.
• Is competitive on the terms of your loan.
• Sticks to deadlines and agreements.
• Doesn’t pressure you into borrowing more money than you can afford to repay.

Instead of working directly with a lender, you could consult a mortgage broker — a middleman who shops lenders for you. Mortgage brokers make money by charging a percentage of the loan amount, generally around one-half percent to 2%. Consider the many types of mortgages available – fixed rate or adjustable, 30-year or 15-year term, government-backed, etc.

Your lender will help you get a mortgage pre-approval based on documented and verifiable information regarding your employment, income, liabilities, cash on hand and your tax returns. Buyers who are pre-approved have an advantage over buyers who haven’t demonstrated their creditworthiness.

Many homeowners defaulted on their mortgages over the past few years because they lied about their financial circumstances and/or worked with unscrupulous lenders who overlooked deficiencies in their loan applications in order to generate more business.

Find the House, Seal the Deal

Now you are prepared to narrow down your home choices and find a seller who wants to make a deal. The typical home buyer searches for an average of 12 weeks and views approximately 12 homes. Your agent will educate you on the prices of similar properties sold in your preferred neighborhood over the past six months, using a Comparative Market Analysis.

If you are serious about a particular home, you might want to get it appraised — something a lender will ultimately require before granting you a loan. Knowing the market value of a home that interests you enables you to negotiate intelligently.

Nothing wastes more time during the home-buying process than buyers and sellers who are wildly apart on the value of a particular property. Be patient, realistic and flexible when making an offer on a home, and always be ready to walk away if you can’t reach an acceptable agreement on price and terms.

Be patient, realistic and flexible when making an offer on a home, and always be ready to walk away if you can’t reach an acceptable agreement on price and terms.

Once you make an offer and the seller conditionally accepts it, you need to order a home inspection to detect any hidden problems with the property. Repairs can be made by the seller or may become the basis of a renegotiated price. Make sure that your purchase contract can be withdrawn under various conditions, such as a poor inspection report or your inability to finalize the terms of a mortgage.

Once a selling price is agreed upon, your lender will require you to purchase homeowner’s insurance and provide other necessary documents needed for your final loan approval. These may include a home appraisal, a property survey, various inspection reports and a final version of the sales agreement. Once your loan is approved, you will be able to settle on a date to close the sale.

Preparing for Closing Day

Closing is the process where ownership of the property shifts to you. A day or two before, schedule a final walk-through of the home to make sure its condition conforms to the contract agreement. Read and comprehend everything in the copy of the closing statement that you should request from the title company that is preparing your closing papers.

Question any unexplained or unforeseen charges. You will have to live with the terms of these legal documents for as long as you own your new home, so take your time and, if necessary and appropriate, review everything with your lawyer or other legal adviser before signing the many pages at the closing table.

Understand all of the costs involved in closing. These typically include:

• A title search fee and the purchase of title insurance.
• Inspectors’ fees.
• Private mortgage insurance if you can’t afford to put down at least 20% of the home’s purchase price.
• Fees to state or local agencies, such as transfer taxes, documentary stamps and deed recording.
• Other miscellaneous fees for the preparation and execution of paperwork and documents.

When you go to the closing, don’t forget to bring proper identification and a money order or certified check to cover the down payment and any balance due listed on the closing statement.

Once the papers are signed and money changes hands, the journey is over — you are a homeowner! With luck, knowing all the steps involved has made the process go smoother and easier.

Now you can experience the advantages, responsibilities, joys and trials of homeownership. And considering our national penchant to move from place to place, it is more than likely that within a decade or so, you will begin the journey all over again.

Buying Homeowners Insurance

Before your lender will agree to let you borrow money to buy your home, you must agree to insure the home. And you must have this insurance lined up before you can close the deal.

Having homeowner’s insurance (also known as hazard insurance) is a requirement before a lending institution will allow you to obtain a mortgage or complete a home sale. This insurance is also designed to protect the homeowner from being forced to go into debt when an emergency occurs. The coverage puts a homeowner in the financial position to repair or rebuild the house.

Types of Homeowners Insurance

There are two types of homeowner’s insurance: cash-value coverage and replacement-cost coverage.

Cash-Value Coverage

Cash-value coverage will pay you back for the depreciated value of your home and your personal property should they be destroyed. While is it usually cheaper than replacement-cost coverage, it likely will not allow you to rebuild your home if disaster strikes.

Replacement-Cost Coverage

Experts recommend a replacement-cost policy that insures your home for the total cost to rebuild it, regardless of its market value — which includes other factors such as your neighborhood, local school district, the land, the type of construction, current condition and home features.

By using your appraisal and comparing it to your insurance agent’s worksheet, you can estimate the replacement cost of your home and buy a policy that will guarantee that amount.

Policies differ in coverage and costs. It is imperative that you shop around for the policy that fits your needs. In addition, you need to understand any exclusions or limitations within the policy you choose.

You may need to purchase extra coverage depending upon several factors:

• Where you live (inland or on a coast)
• What perils are more likely in your area that you want to be protected against (flood and earthquake insurance, for instance, may need to be bought separately)
• The replacement value of your possessions (fine art or expensive jewelry might require higher premiums)
• Special insurance needs

All homeowner’s insurance policies come with a deductible. This is the amount you will pay every time you file a claim with the insurance company. A higher deductible comes with a lower premium, and vice versa.

Other tips about insuring your house:

• Check out a prospective insurance company’s financial strength
• Check with the Better Business Bureau and online forums or message boards to determine the company’s ability to handle claims quickly and efficiently
• Look for any complaints filed against it by other policyholders
• Compare rates and coverage
• Choose a higher deductible in order to lower your premiums
• Decrease your risk to insurers by installing things like a security system, dead-bolt locks and smoke detectors in your home. Keeping your credit score high also makes you a better risk.

What Factors Raise Home Insurance Prices?

Many of the factors that cause home insurance rates to go up every year can’t be avoided, but there are just as many common sense ways to reduce your risks and make your home safer.

The most obvious reasons your insurance gets more expensive include:

• Risky structural designs like wood-burning stoves or fireplaces; balconies or spiral staircases that increase the likelihood of a fall; dangerous electrical wiring; and roofing or plumbing that needs to be updated or replaced.
• Claims made on previous policies, especially when renting.
• You were canceled by a previous insurer because of non-payment.
• You live in a flood zone or areas that regularly are hit by fires, tornadoes, hurricanes, severe snow or ice storms.
• Dangerous elements in or around your house like a swimming pool or dogs, whose bites account for a large amount of claims. Other costly features that add risk to the insurer include trampolines, tree houses or backyard zip lines.
• If crime has increased in your neighborhood, your premiums may reflect the increased risk the insurer feels he or she is taking on.