Answers to Your Top Home Buying Questions
Why buy a home instead of rent?
Aside from the pride you’ll have in your new home, there are many financial benefits of homeownership.
Equity: You will pay your own mortgage instead of your landlord’s. While equity isn’t guaranteed, building equity in your home is often the first step toward building wealth.
Stability: Rent in Dane County is very high and sometimes owning a home is less expensive than renting, even with new expenses factored in. In addition, with a fixed-rate mortgage, your loan payments will stay the same, although insurance and property taxes may increase.
Control of your Environment: Anyone sick of white walls? You can paint your home any color you want! You also can make other improvements.
More space: Many people say that they want more room for children…or dogs. A yard can be wonderful (Don’t forget you have to mow it and shovel sidewalks. Make it a fun activity with your kids!)
Tax deductions (check with an accountant): Depending on your situation, you may be able to deduct your mortgage interest and property taxes and reduce your tax burden.
I’m a single parent. How would I go about buying a home?
Provided you have enough income and good credit, there’s no reason you can’t become a homeowner. Most people coming to our classes are single and many are parents as well.
Become familiar with the process, choose a good lender who can look at your financial situation and help you determine which loan programs are best and how much house you can afford. Then get a pre-approval letter and you’re ready to shop for your home!
Attending a home-buyer class is a great place to start.
Should I use a real estate agent? How do I find one?
Having a real estate agent who works for you—called a “Buyer’s Agent”—is important to a successful home purchase. Interview several agents to find a good fit. Consider a realtor who is a member of the Home Buyers Round Table. A realtor:
- Guides you through the complicated home-buying process and makes the experience easier.
- Is well acquainted with the neighborhood you consider (quality of schools, the number of children in the area, the safety of the neighborhood, traffic volume, etc.)
- Has immediate access to homes as soon as they’re put on the market to save hours of wasted driving-around time.
- Points out ways to structure your deal to save you money. (Ask your realtor about seller’s credits! Some seller’s will add a credit to the sale.)
- Guides you through the paperwork, helps you and answer questions throughout the process, and is with you as you sign the final papers at closing.
BONUS: You don’t have to pay the broker anything! The payment usually comes from the home seller—not from the buyer.
How much money do I need to buy a home?
You’ll need enough savings to cover:
Earnest money: The deposit you make on the home when you submit your offer. This deposit proves to the seller that you are serious about wanting to buy the house. When you make an offer on a home, your real estate broker will put your earnest money into an escrow account. If the offer is accepted, your earnest money will apply to the down payment or closing costs. If your offer is not accepted, they will return the money to you. While the amount of earnest money can vary, your deposit will range from $500-$2,000. (One thing to keep in mind is that once an offer is made and the earnest money is transferred; you simply cannot just walk out of the sale without jeopardize losing the earnest money. Make sure to communicate all concerns with your realtor prior to making an offer.)
Down payment: The more money you put into your down payment, the lower your mortgage payments. Down Payment Assistance loans can help. But even down payment assistance programs require a down payment from the borrower, this can range from $500 – 1% of the offer. As a good rule of thumb, try to have 3-5% of the price you’re looking to purchase.
Insurance and Inspection: Two costs you must pay out-of-pocket include: the home inspection and one year of homeowners insurance. Homeowners’ insurance averages over $600/year and home inspections are between $300 and $750. See our member list to help you choose your insurance agent and home inspector. Don’t forget to ask about Radon testing if the house has a basement.
Closing costs: The costs associated with processing the paperwork to buy a house. Closing costs—which you pay at closing—average 1%-3% of the price of your home. These costs cover the fees your lender charges and other processing expenses. When you apply for your loan, your lender will estimate your closing costs, so you are not caught by surprise.
How do I know if I can get a loan?
The only way to know if you can get a mortgage loan is to speak with a lender. This professional will look at your specific financial situation, help you evaluate your loan potential, and, if you’re ready, provide a pre-approval letter. Lenders consider:
Credit: Essentially, but not exclusively, your credit reports and credit scores plus policies and limits for each lender. Some programs require a 640+ credit score.
Capacity: Ability to pay. This includes income, current debt payments, and other factors.
Capital: Money available. A lender will take your current savings into consideration.
Collateral: Value of property securing the mortgage loan. This is determined by the appraisal ordered by the lender.
How do I find a lender?
Shopping for a loan is like shopping for any other large purchase: you can save money if you take some time to look around for the best loan for you, be it from a bank, credit union, mortgage company or mortgage broker. Things to take into consideration:
- Annual Percentage Rate (APR): Reflects not only the interest rate, points, fees and other charges. APR is higher than the interest rate. Interest rates and APR may vary between lenders.
- Loan Programs: Lenders offer different loan programs. Talking to more than one lender allows you to compare loan products that may be best for you. Be careful on having your credit run by multiple lenders. You can ask high overview questions without having your credit scanned. Once you are ready to take the next step, then you can have the lender check out your credit.
- Down Payment Assistance (DPA) loans: With DPA, all lenders are NOT created equal. Some lenders have some or all DPA loans available; others may have DPA available, but they do not promote them. DPA loans require extra paperwork and time, so, if you’re eligible for DPA, choose your lender accordingly. Many HBRT lenders are experts in Down Payment Assistance.
NOTE: When comparing lenders and products, do so within 14 days. When calculating credit scores, credit bureaus consider three mortgage (or auto) loan inquiries as one. But timing is critical. Having your credit score fall because you’re trying to find the best mortgage would be unfortunate.
What makes up a mortgage payment and what other costs do I need to consider?
- PITI: Virtually all first-time home buyers will be required to “escrow” their real estate taxes and insurance. Therefore, PITI comprises:
- Principle: Amount used to pay down the balance of the loan
- Interest: Cost paid to the lender for the use of the money borrowed
- Taxes: Real estate taxes. The lender then pays the property taxes at the end of each year.
- Insurance:There are several types:
- Homeowners’ Insurance. You pay the first year before closing and the lender pays each year thereafter.
- Private Mortgage Insurance (PMI): Insurance that a borrower must purchase to protect the lender in case of loan default. This is required if the down payment (including down payment assistance) is less than 20% of the property value. Depending on the loan product, some lenders may refer to it as Mortgage Insurance Premium (MPI).
- Homeowner association or condominium association dues: These expenses can be considerable, and a lender will take them into account in determining the amount you can borrow.
Monthly utilities: Utility costs for a single-family home are likely to be higher than for an apartment. Check online or your real estate broker will help you get information from the seller on how much utility bills normally cost. Be sure to look at a full year of actual charges.
Repair and Maintenance: Unlike a renter, a homeowner handles all upkeep, repairs and maintenance. That means you’ll need a lawnmower, a snow shovel and, maybe, a new furnace or water heater. Factoring these expenses into your money management plan is essential to successful homeownership. Saving 1% of the purchase price each year will help ensure that you can pay for any needed repairs in the coming years.
What do I need to bring when I apply for a mortgage?
- Social security numbers for both you and your spouse (if both of you are applying for the loan)
- Copies of your checking and savings account statements for the past two months
- Evidence of any other assets like bonds or stocks
- Two recent paycheck stubs detailing the earnings for all household members
- A list of all credit card accounts, and the approximate monthly amounts owed on each
- A list of balances due on outstanding loans, such as car loans
- Copies of your last 2 years’ federal income tax returns and W-2s
- The name and address of someone who can verify your employment.
I know there are many different types of mortgages. How do I know which one is right for me?
Different loan products are appropriate for different borrowers and not all lenders can offer all loans. A lender can help you determine which will work best for you.
- Conforming/Conventional: Meets Fannie Mae/Freddie Mac requirements. Fannie Mae or Freddie Mac purchases these loans.
- Portfolio: Some lenders loan their own money and may have more flexible requirements.
- FHA: Federal Housing Administration
- VA: Veterans Administration
- USDA Rural Development Loans: US Department of Agricultural
- WHEDA: Housing and Urban Development Authority.
Fixed-rate Mortgage (FRM): your interest rate stays the same for the term of the mortgage, such as 30 years.
ADVANTAGE: You always know how much your mortgage payment will be, and you can plan for it.
Adjustable-Rate Mortgage (ARM): Interest rate and monthly payments usually start lower than a fixed-rate mortgage, but your rate and payment can change either up or down, as often as once or twice a year.
ADVANTAGE: You may be able to afford a more expensive home because your initial interest rate will be lower.
CONCERN: The initial payment may be attractive but be sure that you can afford the payments if/when the interest rate rises. With interest rates at historic lows, an ARM may not be the best option right now.
What happens if my offer to purchase is rejected?
They often are! But don’t let that stop you. Now you negotiate. One important benefit of having a real estate agent is their expertise in negotiating. Often, negotiations go back and forth several times you agree on a deal. Just remember—don’t get so caught up in negotiations that you lose sight of what you really want and can afford! Consider writing a letter to the seller stating why this house is so important to you and to your family. There’s many examples online, check them out and talk to your realtor to see if this is a good option for you. Often times these letters are sent with the initial offer so use this tid bit to gain the heart of the seller.
What will happen at closing?
“Closing” is the last step in the home buying process. All parties come together to complete the home purchase transaction and pass over the keys to you! The steps are:
Bring money: You’ll need to bring a cashier’s check to closing. Your lender will let you know how much, or little, to bring. Plan ahead and visit your local bank to secure a cashier’s check.
Final walk through: Verify the property is in the same condition as agreed on.
At closing table: All parties are in attendance, including buyer and seller and their real estate agents, lender and closing agent. The closing agent will have a stack of papers for you and the seller to sign. Although he or she will give you a basic explanation of each paper, take the time to read each one and/or consult with your lender to make sure you know what you’re signing.
Be aware that only an attorney can give legal advice, so if you have any concerns about these documents, you may want to hire an attorney.
You leave with the keys to your new home. Congrats! This was a long journey but so worth it!