Home Ownership

Before starting the process specific to buying a home, it’s important that you reflect on what you need in a place of residence as well as get an understanding of what your finances can afford. As you identify the most important aspects and financial constraints of your future home, consider the following:

• Price Range- How much house can you afford? Not only the up-front price, but also the month to month expenses of your mortgage, utility bills, local taxes, etc. Many personal finance experts will recommend no more than 30% of your income be used for home expenses, advising further caution for individuals who are on course to spend 50% or more of their income per month on their place of residence.
• Down Payment- How large of a lump sum are you intending to put forth on top of the home loan you are acquiring? 20% of the home’s price has been a historic benchmark to aim for, however certain mortgage programs targeted for new buyers could require as little as 3% down. Remember, the higher the down payment, the smaller the monthly mortgage payment will be.
• Mortgage Programs- As noted above, there are several types of mortgage programs. Some are even designed to help certain types of populations- such as those with past negative credit history or first time home buyers- that can make getting approved for a mortgage more attainable. Researching these programs and knowing the pros and cons of various types of mortgage arrangements, is a vital step before starting the home buying process.
• Property/Local Taxes- Unlike the costs associated with renting, owning your place of residence also means being responsible for various tax expenses. This new type of cost could come in the form of property taxes leveraged by your township and/or county, from community projects designed to better the local schools, parks, roadways, or other projects that directly serve the residents.
• Location- One of the most significant factors in determining where you want to live, location considerations can stem from professional aspirations, access to amenities, community vibes, and so much more. Location also serves as a major driver of price.
• Size- How much house do you need or want? Consider the number of bedrooms and bathrooms you need, as well as the space you need for things like a kitchen, common area, and storage.
• Fixer Upper vs Turn Key- As future buyers reflect on their personal and financial needs in a home, another consideration that presents itself is whether or not your situation warrants purchasing a “fixer upper”- a home that needs improvements and repairs- or buying “turn key”- a place that needs no updating and is ready to live in upon your move in. Renovations may be easier on your budget upfront since the work the house needs will probably be reflected in the purchase price, however the cost for materials and labor may not result in as much of a savings as you envisioned. Take time to research the cost of repairs and projects you would most like to do first when assessing the overall price of your potential residence.
• First Home vs Forever Home- Another major home buying consideration is whether or not your purchase is a “first home”- something that fits your needs now but won’t necessarily work for you long-term- or your “forever home”- a residence that not only meets what you need now, but will work as your life changes. Since a forever home is likely to accommodate more people or have nicer upgrades and finishes, you are likely to see a larger price tag. However, living in a starter home means that, inevitably, you’ll need to go through the home buying process again!
• Climate/Environmental Conditions- Before buying your home, reflect on the climate and environmental factors your residence is situated in, as it may impact your planned home ownership expenses. For example, if you plan on living in area that is a designated flood zone, you may be required to obtain additional insurance coverage, or you might need to purchase items for your home like a sump pump designed to reduce the risk of water accumulation and subsequent damage to your home and its foundation. Even something like living in a colder climate could mean heating expenses you weren’t necessarily prepared for, so be sure to think about how the environment will impact your home expenses.
• Access & Amenities- Are you looking for to live near a bustling city? Have an ample selection of stores and shops? Or would you prefer to be surrounded by community parks and trails? What your home has access to and the various amenities available for easy and regular use will also be a determining factor in the home you choose to purchase.

Once you have identified your financial situation and prioritized the must-haves in your future home, it’s time to begin the larger aspect of the home-buying process. Buying a home is a lengthy process with various parties involved. The turnaround time to complete your home purchase is likely to take several months from the time of pre-approval and shopping around through closing costs and exchanging of keys. While the experience involved with purchasing a home is likely to differ from person to person, the same core steps of the process tend to be universal.

 

Step 1: Research Lenders

Before committing to working with one lender over another, take the time to research your options. What are the different types of mortgage programs that lender offers? What are their loan rates and terms of repayment? Do they have any negative reviews? Are there any complaints that have been filed to the Better Business Bureau?

As far as your credit goes, shopping around and comparing loan terms is not inherently penalized through the credit reporting process. In order to get as accurate of a picture with a lender as you can, your credit will need to be officially pulled, or go through what is known as a hard check. But when researching different lenders, this means that you are probably going to see your credit checked multiple times. As long as those credit checks take place within a reasonable time frame, around 4 weeks or so collectively, your credit will only be reported as having been checked a single time.

Step 2: Obtain Pre-Approval

Going hand-in-hand with finding your lender is receiving pre-approval for a home loan. A pre-approved loan not only demonstrates serious intention to seller’s that you are looking to purchase a home, but it also gives you a very clear picture of what types of homes and price ranges you can actually afford. 

Keep in mind that pre-approval for a mortgage is time sensitive, and will last anywhere from 60-90 days. To avoid extending the home buying process and having your credit checked unnecessarily, obtain your pre-approval when you know you are ready to purchase and move into a home within the following 2 or 3 months. 

Step 3: Find a Realtor

With over 85% of Americans using a real estate agent or organization to help facilitate the home buying process, this a step many will find imperative when purchasing their residence. As you look for a realtor to work with, focus on the following:

• Credentials and certifications, such as being a member of the National Association of Realtors
• Years of experience as a realtor
• Expertise and knowledge of the area you are shopping in
• Communication style most preferred
• Number of clients they are currently working with
• Experience working with clients similar to yourself (1^st time buyer, rental property, etc.)

Step 4: Begin House-Hunting  

The fun part for many, once you have been pre-approved by your lender and have located the real estate expert who will assist you, go out and look at houses on the market in your desired location and at your designated price range. You can also uses sites like Zillow, Realtor.com, and Trulia as you hunt for your perfect home. Keep in mind that the process may not be as glamourous as it looks like on tv, and remember to keep your top must-haves in mind as you review potential homes!

Step 5: Make an Offer

Oftentimes easier said than done, once you find a home you want to buy, you’ll need to extend an offer for purchase to the seller. Generally, the offer process is done between realtors- one acting on behalf of the buyer and the other working with the seller. It is likely that some form of negotiations will take place between the buyer and seller parties.   

Step 6: Complete Your Loan Application

Even though you were pre-approved, you still have to formally secure your mortgage loan. Your lender will need you to finalize the loan application and agree to their terms and conditions. This is likely to be the stage that you will see estimates for closing costs, additional expenses needed to finalize your home purchase, and the required down payment.

Step 7: Have Your Home Appraised

To ensure you aren’t borrowing more than what the home is actually worth, and to double check you aren’t being conned into egregiously overpaying, a lender will oftentimes require that the home be appraised. An appraisal will take into account many different factors, like size, the inside and outside conditions of the home, and any renovations or updates that have impacted the overall value of the home. Keep in mind that if the appraisal comes in at a price lower than your pre-approved loan figure, the lender will require that you pay the difference out of pocket!

Step 8: Have Your Home Inspected

Similar to the way an appraisal offers assurance in value for your lender, a home inspection can provide peace of mind for yourself as a buyer. A home inspection will consist of a professional essentially doing an assessment of the house to look for concerns and potential hazards, such as pest infestations, structural soundness, mold, broken appliances, and other signs of damage. Buyers generally secure their own inspector, and if anything is discovered through the inspection, will likely become the buyer’s responsibility, unless you can negotiate repairs or updates in the sale of the home.

Step 9: Obtain Home Owner’s Insurance

Since most buyer’s rely on a home loan for purchasing, lenders will require that your house has valid coverage. Insurance not only protects the lender’s asset, but it’s also a great way to protect your own investment!

Step 10: Schedule a Final Walk Through

Though not necessarily required, it may be wise to do a final walk through of the home you intend to close on and purchase. Especially if you negotiated repairs or any updates with the seller, you can ensure the work was actually completed. This is more or less the last window of opportunity to look for anything else of concern in the home that may cause you to forego the purchase.

Step 11: Close on Your Home

Closing on a home is another way of saying finalizing the purchase. The closing process typically involves a lawyer or closing agent, reviewing and signing several documents, and the official transfer of home ownership from the seller to the buyer. Closing generally takes place 4-6 weeks after the purchase offer has been accepted and when initial sales contracts have been signed. Be sure to bring multiple forms of identification and check that you have everything you will need to provide at closing. 

The closing process starts with your lender providing a disclosure of the final costs due and the breakdown of your mortgage expense. These final expenses associated with closing costs may vary based on the loan and your terms, but you generally want to have the equivalent of 3%-5% of the loan amount set aside to pay for these costs. You’ll be asked once more to sign and formally agree to the terms of the mortgage. As the buyer, you must provide proof of funds, typically done with a cashier’s check. The funds are then exchanged, along with any other documents pertaining to ownership of the home as well as the keys to the residence.

 

At the end of this stage, you are officially a home owner and can begin the process of moving in and settling into your new place of residence! You'll also start making your monthly mortgage payments 15 days or so after closing and will have recurring payments until the loan has been paid in full. Review the required payment schedule and consider setting up auto-pay to ensure no payments are ever missed. 

 

It’s no secret that buying a home is a significant financial commitment. Yet many of the costs buyers will prepare for are the one-time, upfront expenses associated with purchasing the residence and the monthly payments due on the mortgage.

From there, home buyers must plan for the financial commitment that comes with ownership- upkeep and maintenance of the home long-term. Some experts recommend a savings goal for home maintenance based off of two different benchmarks

• Percentage of home’s value or purchase price- 1% is most commonly recommended, however ranges closer to 2%-4% are also suggested as realistic goals to save for when it comes to home maintenance costs
• Percentage of total monthly mortgage, insurance, and property tax payment- 10% of the total payment is what you would want to aim for in monthly savings contributions towards future home upkeep costs

In addition to following a financial "rule of thumb" approach for home ownership savings goals, you can also research the costs of common home repairs and services. 

Ally, an online financial institution, provides the following estimates for several home maintenance costs: 

• Pest Control: $250-$400 per visit 
• Security System Installation: $300-$840 (not including monthly fees for monitoring and alerts that some systems charge!)
• Lawn Care: $400-$1,000 per acre

State Farm Insurance provides similar estimates for what many would consider "big ticket" home appliances... even in a new build, eventually you'll need to replace these items! 

• Furnace: $2,150-$5,900 
• Water Heater: $812-$1,575 
• Central Air Conditioner: $3811-$7,480

However you determine the amount you should be saving for home ownership costs, think critically about the types of home maintenance costs that are relevant for you and do what you can to identify a timeline of sorts for when these costs might come due, such as seasonally associated expenses (leaf and snow removal) and usage or "life" expectancies for your appliances and other components of your home (roof and windows).