Are You Ready to Buy a Home?

While it may be acceptable to snap up a pair of shoes on an impulse, the choice to buy a home requires thoughtful planning and decision making.

Whether you’re becoming a homeowner for the first time or you’re a repeat buyer, buying a home is a financial and emotional decision that requires the experience and support of a team of reliable professionals including a REALTOR®, a lender, a lawyer and a range of other individuals.

Why Do You Want to Buy a Home?

The emotional part of the decision comes into play when you think about why you want to move. If you’re a first-time buyer, you need stability in your career and the desire to commit to living in the same community for five to seven years. You should want to establish roots in a neighborhood and look forward to decorating as you please without requiring a landlord’s permission.

Purchasing a home is a lifestyle choice that requires you to think about how you like to spend your time and the type of community where you want to live—such as a rural area without nearby neighbors, a high-rise building in a city or a home within a planned community with recreational amenities.

The more you understand your priorities for a home, the easier it will be for you to narrow your real estate decisions.

Homeownership can also be a powerful way to increase your personal wealth for you and your family, since you’ll be building equity in your home as you pay off your mortgage.

Are Your Finances Ready for Homeownership?

While your dream home may not be within your reach right away, you can take steps to become a homeowner the moment you earn your first paycheck.

In order to qualify for a mortgage to buy a home, you’ll need good credit, a pattern of paying your bills on time while still saving money and a maximum debt-to-income ratio—your gross monthly income compared to the minimum payments on all recurring debts—of 43% or less. Some lenders have stricter guidelines, so the lower your debt-to-income ratio, the better your chances of a loan approval.

While loan programs are available with low down payments of 3.5% to 5%—and a few programs offer no down payment at all—you’ll still need some savings to pay for closing costs, moving expenses and an earnest money deposit on a home. It also is very wise to have cash reserves on hand after you buy.

Saving money and preserving or improving your credit history are essential elements to homeownership.

What Can You Afford to Buy?

Housing prices and rents vary from one location to another, but you can use realtor.com®’s Rent vs. Buy calculator to estimate the difference between your current rent and buying a home. In some markets, buying a home can cost the same or even less than renting.

        

Remember, when you’re a homeowner, you also need to includehomeowners insurance, property taxes and homeowners associationdues in your housing costs. You should use realtor.com®’s home affordability calculator to help you estimate what you can pay for a home.

In addition, you should think about your plans for the future and how you spend your money—along with your comfort level with a mortgage payment. A lender will tell you how much you can borrow, but that lender won’t know how much you spend on travel or golf or your plans for potentially reducing your work hours when you have a family.

Once you’ve thought through the emotional and financial aspects of becoming a homeowner, your next steps should be to find a reliable, experienced REALTOR® to become your partner in the home-buying process and to meet with a reputable lender who can discuss your options for financing your purchase.

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Read the rest of the 10-Step Guide to Buying a Home: 

Step 1: Are You Ready to Become a Homeowner?
Step 2: Get a REALTOR®
Step 3: Get a Mortgage Pre-approval
Step 4: Look at Homes
Step 5: Choose a Home
Step 6: Get Funding
Step 7:  Make an Offer
Step 8: Get Insurance
Step 9: Closing
Step 10: What’s Next?

Pre-Qualification to Homeownership in 6 Easy Steps

For many home buyers, pre-qualification is the first step to buying a house.

But you shouldn’t put your feet up after the first step and expect everything to just fall into place: There’s plenty more to be done.

Here’s a straightforward guide for going from pre-qualified buyer to homeowner the smart way.

Step 1: Pre-Qualification

The pre-qualification process is quick and free. It should take less than an hour. During the process, you speak with a loan officer and answer questions about your financial situation.

Pre-qualification will give you a rough estimate of how much house you can afford. It’s not a binding agreement—it’s simply something you can use to gauge your buying capability.

Pre-qualification can be especially useful if you’re not sure you can afford a mortgage.

Step 2: Pre-Approval

After you’re pre-qualified, your next step is to get pre-approved. This is an in-depth process. You’ll need to submit paperwork about your income, assets, employment history and residency status to a lender.

Getting pre-approved is almost like applying for a real loan, but it happens before you select a home.

Step 3: Shop 

Now it’s time for the fun part: home shopping. Using your pre-approval amount as a guide, shop for homes within your budget.

Since sellers and REALTORS® view pre-approved buyers more favorably, shop with confidence. You’ll come across as a much more serious buyer than any non pre-approved competitors.

Step 4: Put in an Offer

Once you find a home you want to buy, the next step will be to put in an offer. If your offer is accepted, you’ll need to apply for a loan. The mortgage process can take some time, but since you’ve been pre-approved, the process may be faster because the lender will have all or almost all of your needed documents.

However, if too much time has passed since you were pre-approved, you’ll need to provide fresh bank statements and document updates.

Step 5. Maintain Your Financial Profile

Be aware that changes in your financial situation can affect pre-approval. When you’re in the process of obtaining a loan, do not do the following:

• Take out on any new debts or make big purchases.
• Switch jobs.
• Change careers.
• Make any big life changes that could put your financial capabilities in question.

If you’re looking to change jobs or buy something expensive, wait until after closing.

If all goes well, you will be cleared to close—meaning you are fully approved. You’ll get a date for closing. During closing, you’ll sign and double-check mortgage documents.

If anything looks different than you were promised, don’t be afraid to back out; it’s better to leave a bad deal than to be locked into one.

Step 6. Get the Keys

When those papers are signed, you can grab your new keys. Now you’re a homeowner—congratulations!

It’s time to transfer the utilities, move in and make your new house your own.

Updated from an earlier version by Laura Sherman.

New 15-Year Mortgage With $0 Down Payment Debuts

Just when you thought the days of zero down-payment loans were gone forever, a nonprofit is testing a new concept to offer low-to-moderate-income home buyers the chance to secure a 15-year mortgage with little to no money down.

The Wealth Building Home Loan (WBHL) creates a path to homeownership for first-time buyers, low-income buyers and those burdened by student debt but earning a solid income.

The WBHL has a generous credit requirement, as income is weighed more heavily than FICO scores. It also offers a chance to build equity at a faster clip than a traditional 30-year mortgage, according to one of its creators, Edward Pinto of the American Enterprise Institute International Center for Housing Risk.

“In the first three years of a WBHL, 77% of monthly mortgage payments pay off principal, creating huge amounts of equity,” Pinto said.

The 30-year fixed-rate mortgage—which has become the industry standard—attributes 68% of each mortgage payment to interest in the same period, according to Pinto.

“This will be a game-changer,” said Bruce Marks, CEO of the nonprofit Neighborhood Assistance Corporation of America (NACA), in a statement. “The majority of the mortgage payment will now go to the equity in the home effectively providing debt-free homeownership.”

Home buyers can convert their down payment to buy down the interest rate. If they don’t have money to put down, they can use a 3% seller concession to buy down the interest rate to near zero. For every 1% paid upfront, buyers can get a half percentage point discount in their interest rate, twice the industry standard for rate buydowns. Bank of America will hold the 15-year mortgage loans and subsidize the interest rate buydown.

Monthly payments are a bit higher with the Wealth Building Home Loan, but because the term is truncated, the buyer will own the property free and clear in a shorter time.

NACA is tasked with providing the loan, while Bank of America and Citigroup are funding the loans. The WBHL is only available through NACA. The nonprofit has 37 locations nationwide and is using Charlotte, NC, as the initial test market.

4 Things You Need to Know About the Escrow Process

Once you’ve found the home of your dreams and joined the seller in a hearty handshake, there’s still one more step to complete.

That final step is the escrow process, also referred to as closing.

While your real estate agent, lender, title agent and closing agent will guide you through the process, that doesn’t mean you should be unaware of what’s taking place.

Here’s what you need to know to understand escrow and get the best deal.

1. What Title Companies Do

Title companies make sure a title is clear of any and all encumbrances. This includesliens, judgments, forgeries, fraud and anything else that must be cleared before the deal goes through.

After the title company deems the title clear, it issues an insurance policy (title insurance) to protect the buyer and lender from claims and disputes over the property that may occur in the future.

2. What Escrow Agents Do

Escrow services provide a neutral third-party agent or officer who handles title and escrow work, financing, transaction instructions and other paperwork related to the home purchase, mortgage refinance or other title transfer.

Escrow officers are there to safeguard documents, follow instructions and make sure everything is filed timely. They’re not there to provide advice to buyers. But if closing is taking too long, you may want to reach out to the escrow officer to see if there is anything you can do to expedite the process.   

3. How to Find Good Agents

Your real estate agent may suggest a closing agent, but you can also seek referrals from family members, friends, co-workers and other professionals you trust. You want a referral to the title or escrow officer—not the company.

The officer should be familiar with the type of home you are buying, especially if it’s a condo, multiplex or historic home. You also want to find an office conveniently located near you to save time.

4. How to Find the Best Deal

Many home buyers aren’t aware they can shop for title and escrow services. While lenders will suggest companies, you don’t have to go with their recommendation.

Fees vary, so you can do some comparison shopping:

• Ask for a list of title and escrow costs. Check on everything from escrow service fees to title search and insurance premiums.
• Determine whether the buyer or the seller pays the fees.
• Be aware of title and escrow discounts available for refinance-related transactions or sales that include the same lender and title and escrow services.
• If the initial quote seems low, watch out for incidental fees likes wire transfer, copying, courier and fax fees. Those smaller items can add up.

Keep in mind, title and escrow services don’t dictate fees related to the home loan. While all fees—title, escrow, lender and more—show up on the final settlement sheet (known as the HUD-1 document), lender fees will be generated by the lender.

Updated from an earlier version by Broderick Perkins.

The Essential Pre-Pre-Approval Checklist

Pre-approval may be the first step towards getting a mortgage, but you’ll need to get some things in order first.

When you’re ready to start the home-buying process, begin by following this pre-pre-approval checklist—and you’ll be in a great position to secure the mortgage you need to buy the home you want.

1. Review your credit report (get one for free at annualcreditreport.com).

2. Dispute any blemishes on your credit report if they don’t look right.

3. Gather your (and anyone else applying for the the mortgage) last two years of tax returns and proof of income (W2s or pay stubs)—or your year-to-date profit and loss statement if self-employed.

4. Have your down payment money and closing money ready in the bank.

5. If the down payment and closing money were gifted to you, be ready to explain it.

6. If you’ve been renting with a private landlord, put together the last 12 months of proof (such as check copies and money order receipts) showing that you’ve been on time each month with your rent payments. Also ask your landlord for a written referral.

7. Gather personal documents, like two forms of government identification. Also haveother personal paperwork, like copies of divorce papers, if applicable.

8. Provide proof of regular income from all forms including Social Security, child support or government assistance.

9. Provide proof of account balances for IRAs and retirement accounts.

10. Disclose money held in the stock market.

11. Bring proof of other property currently owned.

12. Be ready to disclose past financial issues like bankruptcy. Provide a written explanation of what happened and what steps you have taken to correct your situation.

13. Keep your credit score healthy. So do not do the following:

• Apply for new credit.
• Take on new debts or make large purchases.
• Cancel any current credit accounts.
• Ask a creditor to lower your limit.

Remember, if you apply for a mortgage loan with an excellent credit score and the score goes down during the pre-approval or mortgage process, you may not qualify for the loan.

When you’re all done and the pre-approval is successful, your lender will give you a Good Faith Estimate, or GFE. This is a line estimate of what your general mortgage costs will be if you go with that lender. Now that you have it, there’s one final step to take.

14. Go to another lender and get pre-approved all over again.

You’re not done yet. Mortgages are too expensive to take the first offer. Get out there and do some comparison shopping, using those GFEs as your guide.

Updated from an earlier version by Laura Sherman.

Avoid These 4 Common Mistakes When Selling Your Home

When selling your home, it’s easy to get caught up in second-guessing your decisions.

You don’t want to overprice or undersell. You need to showcase your home but you don’t want to make things look forced or pressure potential buyers with a “hard sell.” You want a good listing agent who understands the market and knows what works where you live.

You’ll want to make sure that all the ups and downs, the almost-sells and the strangers’ critiques don’t become an emotional rollercoaster that dictates your life.

Work to avoid these four mistakes, and you’ll find yourself doing the right thing at each stage of the process.

1. Price Points

Your home must be priced competitively to sell. Overpricing can leave your home lingering on the market. Buyers compare your sale price with comparable homes in the area—looking at places similar in square footage, construction, numbers of bedrooms and bathrooms, age and condition.

Your real estate agent can provide you with a Comparative Market analysis, often referred to as comps, on your home to assist in establishing a competitive price. Comps can include homes recently sold or currently on the market.

While everyone hopes to maximize the sale of their home, pricing yourself out of the market could leave your home unsold for a long time. Competitive pricing will spark considerably more interest and can generate multiple offers—and ultimately a better sales price and quicker sale.

As for appraisals, they’re easy to misunderstand. An appraisal isn’t the market value of your home: It is an opinion on value that means one thing to a mortgage lender and another to your local appraiser, who collects real property taxes based on that assessment.

2. Showcasing Your Home

You want potential buyers to imagine themselves in your home. You don’t want any hiccups. Take the time to fix any visible issues such as broken windows and chipped or peeling paint, as well.

Removing clutter and doing simple upgrades to window coverings and counter surfaces can also make good impressions. Ditch ugly furniture and clutter that detracts from the cleanliness of each room. Consider staging each room: There’s an art to filling a space with some personality without making it too personal.

Also consider the photos, videos, and other marketing materials your real estate agent might suggest. Many potential buyers scour online listings, so photos that show off the best of your house can make the difference between full or sparse open houses. Some homeowners even start house blogs.

Your real estate agent will know professionals to consult and may offer photos and video as part of their home-selling package.

3. Customer Mindset

Don’t make the mistake of thinking each prospective buyer will be “the one”: Patience will allow you to survive the home-selling process.

Your real estate agent may suggest leaving the house when it’s time to show the home. The last thing buyers want is an owner following them, anticipating questions and pointing out each improvement and amenity. Let them discover things on their own.

Not everyone visiting your home will bid: You’ll likely have at least some lookers who just want to window shop, especially during an open house. You may also have people who want to get a sense of the area, perhaps because they’re interested in a nearby home. Or maybe they want perfection and will look at 50 homes—and not buy anything.

By keeping your expectations in check, you’ll protect yourself from disappointment.

4. The Right REALTOR®

Interview several agents before selecting one and signing a listing agreement. The more REALTORS® you interview, the easier you can evaluate their qualifications versus your needs. It’s important you choose someone who makes you feel comfortable and confident about the decisions you will make.

The listing agreement will govern your rights and the REALTOR®’s duties and responsibilities. Be sure you understand the language of the agreement and that it contains a guarantee of performance—and a right to cancel. Don’t be afraid to ask all the questions you want before you sign.

Professional real estate agents understand seller anxiety and are more than happy to provide you with all the information you seek.

Updated from an earlier version by Frank Alan Herch.

6 Reasons Your Home Loan Application Was Rejected

A denied home loan application can mean more than just having bad credit.

Remember, you don’t have to take “no” for an answer. If your loan application is rejected, don’t let your disappointment prevent you from shopping around.It’s disappointing to learn that your application for a home loan has been rejected. But you have a right to know why: Sometimes the reasons given for rejecting loans are logical, and other times they may seem unfair.

Lending is a competitive business, and some companies are more flexible than others. Credit unions and community banks may take more time to analyze your particular situation.

Here are some common reasons for loan rejections and possible solutions.

1. You have a low credit score

Lenders look closely at your FICO score. Reports maintained by the major credit bureaus are used to determine your creditworthiness. Get copies of these reports to learn what you can do to repair any problems. It’s possible that the reports contain errors that can be corrected.

Each of the three major credit bureaus—Equifax, Experian and TransUnion—will give you one free credit report each year. If the reports show genuine problems, take responsibility for your past actions. Spend a year or two building a solid credit record. Become the type of borrower that lenders are eager to work with.

2. You’ve lost your job

If your employment status changes before your loan closes, it can short-circuit your home-buying plans. Lenders prefer applicants to have held their jobs for at least two years.

You can try another lender, but you may need to delay your purchase until you’ve been employed longer.

3. Your income is insufficient

Your lender may reject your application if it appears that you lack sufficient income for the size of the loan you are seeking. In such cases, you may inquire about making a larger down payment or bringing in a co-signer, such as a relative, with solid credit.

Consider whether you truly can afford the loan you are seeking. Perhaps you should consider buying a home that won’t strain your budget.

4. You haven’t provided consistent information

The lender may have found inconsistencies between the income listed on your application and the information obtained from your employer. Such issues will need to be resolved before you can win loan approval.

Make sure your application is accurate and complete before submitting it to a lender.

5. Your home appraisal was low

If the appraiser says the home you wish to buy isn’t worth the amount you are seeking to borrow, the loan will fall through. It may be best to accept the verdict and be grateful that you didn’t overpay.

An alternative is to use that low appraisal to negotiate a lower sales price.

6. You’re taking on too much debt

The lender may decide that your current debt obligations are too great to add the burden of the loan you are seeking. If you have adequate savings, consider paying off some or all of your existing debt before reapplying for the loan.

Updated from an earlier version by Emmet Pierce.