Si quiere esta información en español, haga clic aquí.
Aside from the pride you’ll have in your new home, there are many financial benefits of homeownership.
- Equity: People in the home buyer classes often say that they’ll be paying their own mortgage instead of their landlord’s. While equity isn’t guaranteed, building equity in your home is often the first step toward building wealth.
- Stability: rent in Madison is very high and sometimes owning a home is less expensive than renting, even with all the new expenses are 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? With your own home, you can paint any color you want! You can also make lots of other changes as well.
- 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.)
- Tax deductions (check with an accountant):
- Depending on your situation, you may be able to deduct your mortgage interest and property taxes and save significant amounts on your taxes.
Provided you have enough income and good credit, there’s no reason that you can’t become a homeowner. The majority of 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 with you and help you determine which loan programs are best and how much house you may be able to afford. Then get a pre-approval letter and you’re ready to shop for your home!
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 here.
- Guides you through the complicated home buying process and make the experience much easier.
- Is well acquainted with all the important aspects of a neighborhood you may be considering (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 you hours of wasted driving-around time.
- Points out ways to structure your deal to save you money.
- Guides you through the paperwork, and is there to help you and answer any questions throughout the process and, importantly, when 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.
You’ll need enough savings to cover:
- Earnest money: the deposit you make on the home when you submit your offer, to prove 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 be applied to the down payment or closing costs. If your offer is not accepted, your money will be returned to you. While the amount of your earnest money varies, your deposit generally will range from $500 – $2,000.
- Down payment: The more money you can put into your down payment, the lower your mortgage payments will be. Down Payment Assistance loans can help with this. Even down payment assistance programs generally require some down payment from the borrower.
- Insurance and Inspection: two costs that you pay out-of-pocket are the home inspection and 1 year of homeowners insurance. Homeowners insurance averages over $600/year and home inspections are generally between $300 and $500. See our member list to help you choose your insurance agent and home inspector.
- Closing costs: the costs associated with processing the paperwork to buy a house. Closing costs – which you will pay at closing – average 1-3% of the price of your home. These costs cover various fees your lender charges and other processing expenses. When you apply for your loan, your lender will give you an estimate of the closing costs, so you won’t be caught by surprise.
- Credit: Essentially but not exclusively your credit reports & credit scores plus policies and limits for each lender.
- Capacity: Ability to pay. This includes income, current debt payments, and other factors.
- Capital: Money available. A lender will take any savings you currently have into consideration.
- Collateral: Value of property securing the mortgage loan. This is determined by the appraisal ordered by the lender.
- Annual Percentage Rate (APR): reflects not only the interest rate, points, fees and other charges. APR is generally higher than the interest rate. Interest rates and APR may vary significantly 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.
- 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 of the lenders who are members of HBRT are experts in Down Payment Assistance.
- PITI: virtually all first time home buyers will be required to “escrow” their real estate taxes and insurance. Therefore, PITI is made up of:
- 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.
- Home Owner’s Insurance. You pay the first year before closing and the lender then pays each year thereafter.
- Private Mortgage Insurance (PMI): insurance that a borrower has to purchase to protect the lender in case of loan default. This is generally required if the down payment (generally including down payment assistance) is less than 20% of the property value.
- Homeowner association or condo association dues: these expenses can be considerable and a lender will take them into account in determining the amount that can be borrowed.
- 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 be able to 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 is responsible for 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.
Hint: When replacing a water heater, go for the 50 gallon, if it will fit. You’ll thank us!
- 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 2 months
- Evidence of any other assets like bonds or stocks
- 2 recent paycheck stubs detailing your earnings
- 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.
Different loan products are appropriate for different borrowers and not all lenders are able to offer all loans. A lender can help you determine which will work best for you.
- Conforming/Conventional: meets Fannie Mae/Freddie Mac requirements. These loans are purchased by Fannie Mae or Freddie Mac
- 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: Wis. 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 exactly 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 than 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.
They often are! But don’t let that stop you. Now you begin negotiating. One important benefit of having a real estate agent is their expertise in negotiating. Often, negotiations go back and forth several times before a deal is made. Just remember – don’t get so caught up in negotiations that you lose sight of what you really want and can afford!
“Closing” is the last step in the home buying process. All parties come together to complete the home purchase transaction, all money is exchanged and the keys are passed over to you, the new homeowner! 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.
- Final walk through: verify the property is in the same condition as agreed on.
- At closing table:
- All parties are generally 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, you may want to take the time to read each one and/or consult with your lender to make sure you know exactly 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’ll get the keys to your new home!!