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Buying a Home

Buying a home is one of the most complicated financial transactions a person experiences in their life. The first time you by a home can be frustrating because there are a number of things you’re generally forced to learn through the process. Some people give up the first time they try because there are too many unexpected things happening during the process.

Our purpose is to help you to understand the home buying process. This will give you the knowledge you need to assist your understanding. You will learn about the different types of homes available, financial limits when you try to get a home mortgage, the extra costs that you incur during closing, and some of the hazards to watch for. Hopefully you will be prepared to deal with the banks, Realtors, lawyers, and loan officers.

The process of buying a home might take up to six months to complete. There is a possibility that, once you find a home, you will not be able to buy it. You might want to ask why you can’t buy the home. There are some things that complicate the home buying process:

• Human emotions and personalities play a large role in this process. For one reason one party or other may back out.
• Most people don’t have enough cash to buy a home. You will have to get a loan from a bank. Banks will not grant a home loan lightly. They will thoroughly check all your references and finances.
• All homes rest on a piece of land, and the land is associated a certain amount of red tape including the deed and taxes. Transferring ownership is complicated and not like other things you have bought in the past.

You can expect that any home purchase will involve at least some of the following steps, provided that everything goes smoothly:

1. Make the decision to purchase a house
2. Get your financial affairs in order
3. Decide on the type of house, the location, and the price range you can afford
4. Talk to a Realtor and start looking at houses
5. Find a house that you like
6. Make an offer on the house
7. Negotiate a price
8. Shop for and select a mortgage company (normally done by your bank)
9. Apply for a mortgage (done through your bank)
10. Wait for approval on the mortgage
11. Wait for the closing
12. Attend the closing and sign all the paperwork
13. Move in to your new home

Make the decision to purchase a home

The decision to purchase a home is involves a number of variables.

• Can you commit to a location for a period of several years? You can’t sell a home right away. It might take months to sell it when you need to move. You will have to pay the realtor a commission so when you sell the home you need to make a profit. You will have to hold the home for several years for it to appreciate in value or you will lose money.
• Can you obtain a mortgage? If not you need to save for a down payment or improve your credit history by paying down your debt.
• Are you prepared to maintain the home? When you own a home you have to do the maintenance yourself or pay someone else to do it. You will have to pay property taxes and insurance premiums once you own a home.

Keep those considerations in mind as you are deciding. You should also keep the following advantages in mind:

• A home gives you a way to gain wealth. The value of your home will appreciate and be worth more money over time. You can sell it for a profit.
• A home gives you some tax advantages. Interest paid on a mortgage is tax deductible. When you sell a home you can roll the money into a new home without paying capital gains taxes.
• A fixed rate mortgage keeps your monthly payment the same until the loan is paid off.
• A home allows you express yourself. When you own a home you can modify it as you would wish, inside and outside.
• A home offers you the privacy you would not get in an apartment.

As we have shown home ownership has advantages and disadvantages. The decision to purchase a home should not be made lightly.

Get your financial affairs in order

You must get a loan to purchase a home unless you’re independently wealthy. This loan is called a mortgage. You will agree to pay the mortgage as specified. The lender will have the right to seize the property if you can’t make the payments. A bank will probably require you to have some things before giving a mortgage to you:

1. You must have cash for a down payment or be qualified for a no down payment type of home loan. The VA has no down payment home loans. You will also need to have enough cash on hand to cover closing costs. Closing costs are the fees you will pay to the people and organizations involved in the purchase of a home.
2. You must have a job with a steady annual income.
3. You must show that the amount you are borrowing will not overburden you financially. Your monthly mortgage payments can not exceed 28% of your gross annual income or your monthly payments for all debt can not exceed 36%.
4. You must have a very good credit history
5. You must have a good balance sheet and net worth.

 

A bank will check your credit history from a credit reporting company like Trans Union. You should obtain your own copy of your credit history ahead of time and make sure that the report you receive is accurate and contains no errors. If you have a poor credit history you should work to repair the damage. The best way to do this is to talk with a credit counselor.

You can meet the last requirement by presenting to the bank a net worth statement. The bank is primarily interested in your existing assets and your existing debts. You can prepare a net worth statement using the net worth calculator.

Please Note:

While you are getting your finances in order you might want to talk with your bank on your financial health. This will save you the frustration of applying for a mortgage and being rejected. A lot of mortgage companies will pre-approve you for a certain mortgage amount.

Decide on the type of house, the location, and the price range

There are at least six different types of houses you can purchase.

• A detached single-family dwelling.
• A Duplex - A detached multi-family dwelling.
• A town house - normally part of a row of connected units.
• A condominium - you own an apartment-like unit but not the land.
• A co-op - you purchase shares in a corporation that owns the building and land.
• Manufactured housing - known as mobile homes.

You can choose to live in any kind of home you want. It’s your decision and will be a long term obligation on your part.

Talk to a Realtor and start looking at houses

Find a realtor you can trust and let them do the leg work for you. They are in the business of finding homes that fit what you want. A good realtor will also not let you buy a home you can’t qualify for. Most of those realtors will do the math for you. The one disadvantage of using a realtor is you’ll have to pay them a commission.

Realtors have the following advantages:

• They’ll have access to a large selection of houses – in these days of computers a realtor who is listed online will have more homes to choose from than most
• They’ll have entry to those homes at any time with a pass key
• They’ll have experience with neighborhoods
• They’ll have an understanding of price distributions, taxes, problems, etc.

If you use a Realtor, take time to shop around and find someone who you can work with on a friendly basis. Seek recommendations from others who have done this. Choose a Realtor with extensive experience, and don’t let the Realtor to rush you.

Find a house that you like

It may take several months of searching to find a home that you like. When you find it you’ll know. Don’t wait for someone to make an offer before you do. You can lose a home you want if you wait too long.

Make an offer on the house

When making an offer you’ll fill out and sign an offer to purchase form and write a check. The check is a deposit is called earnest money and is your guarantee to the purchase when the offer is accepted. The money will be placed in escrow which is a bank account managed by a third party. This is usually the Realtor or a lawyer. If you decide not purchase the home you will lose your earnest money. If the offer is rejected you’ll get the earnest money back. This money is applied to the purchase price at the closing if the deal is successful.

The offer price is the most important part of the offer to purchase. You can offer the asking price or negotiate for something different. If you really love the house, you may have an incentive to offer more to knock out competitors, but generally you will offer less.

Negotiate a price

The seller will either accept or reject your offer. If they reject your offer they may make a counter offer. If this happens you will have the right to accept it or make another counter offer. If you can not reach agreement your earnest money is returned to you and you have to start over again somewhere else.

Shop for and select a mortgage company

Search for a company that has good rates and that seems to understand your financial situation. Ask more than one different bank or mortgage company for quotes. Your local paper will sometimes publish a list of banks with the lowest rates in the area.

Apply for a mortgage

There are two different types of mortgages: fixed-rate and adjustable-rate. Fixed rate mortgages are normally 15-year and 30-years in length. Adjustable rate mortgages come in many different forms, but the most common form starts at some rate and then adjust every so often depending on changes to the prime rate. This is one of the problems with the mortgage crisis of 2007 because people can’t make the payments as their mortgage interest rates go up.

Once you have chosen a mortgage company and a mortgage type, apply for the loan by filling out the appropriate paperwork and supplying all of the requested information.

Wait for approval on the mortgage

Approval may take some time depending on the mortgage company. You may be asked for additional information during this process. Much of the worry coming from this can be eliminated by going through the pre-approval process.

Wait for the closing

When your offer is accepted you and the seller will negotiate a closing date. With the mortgage approved you wait for the closing date, prepare to move, and hope that nothing goes wrong.

Attend the closing and sign all of the paperwork

The closing day should be a day of rejoicing because you will become the proud owner of a new home. This day is instead one of frustration and many small details to unravel.

At the closing you will be required to pay some fees, so bring your check book and make sure you have plenty of money in your account. If out what the closing costs are and have about $1000 more than that for emergencies.

The following is a list of probable costs at closing.

• Loan origination and/or processing fees
• Points on the loan - the more points you pay, the lower your monthly payment.
• Up to one month's worth of mortgage payment, depending on the closing date
• The amount of the down payment
• Lawyer fees – if you have one
• City and county Taxes
• Homeowner’s fees (for town houses, condos, etc.)
• Title search and title insurance fees
• Surveying fees
• Deed registration or filing fees
• Homeowner’s insurance fees (paid either prior to or at closing)

The total figure can add up to lots of money. You might be able to roll these fees into the mortgage, but it is not a good idea to do that. It’s just adding money to an already expensive mortgage. You will also sign more paper than you ever have before in your life.

Move in to your new home

This part is easy, and once you have moved in you can sit down on your couch and congratulate yourself. After several months or years of hard work you have successfully bought your home.

Assistance

Counseling

• Army - E-mail
  
  Anthony Powell – Ft. Bliss, TX
  Wk Ph:  915-568-4453,
  DSN:  978-4453
  Email:  anthony.powell1@us.army.mil

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• Navy - E-mail
  
  Mike Kempf – Pensacola, FL
  Wk Ph:  850-452-6817,
  DSN:  922-3228
  Email:  mikekempf@bellsouth.net

More information

• Important changes to credit reports for 2008
• Links to more information
• mysdcc.sdccd.edu

New Links 10-21-2008

• Boston.com
• The News Service
• mymoney.gov
• http://www.financialstability.gov/

Calculators

• Savings
• Monthly Cash Flow
• 401(k) Value
• Hidden Expense
• Life Insurance
• Loan Amortization
• Net Worth
• Retirement Planning
• Taxed and Non-Taxed Compounding

Glossary

• Common terms in financial planning

News

• HOME REFINANCE AND MODIFICATION OPTIONS

General Information

• SDCC has articulated the Navy PFM course for one college credit. Navy personnel who have graduated from the Navy PFM course qualify. Typically, it can be difficult to apply one credit and meet the requirements of a three credit semester long course at most colleges and universities. With that in mind, we have taken the initiative of developing a two credit online course that will be available upon completion of the Navy PFM course. Sailors who have completed the requirements of both the Navy PFM course and the online PFM course will be given credit for completing the three credit Consumer Studies 110 course offered by San Diego City College and Mesa College and transferable to any Servicemembers Opportunity College (SOC).

• For additional information or to see if you qualify contact a PFM counselor.