Home Buying 101

Buying a home is a wonderful – and complicated – adventure. It's exciting to shop for a house to call your own. Looking for the perfect home for you and your family is just one small part of the overall home buying process. A successful home purchase requires you to consider a lot. 

Know What You Can Afford 

Knowing what you can realistically pay for a house without going into significant debt you cannot pay off is critical to purchasing a home. The first step is to consider what you would be comfortable paying monthly for a mortgage. To do this, you'll need to evaluate the following: 

• Your total household income after taxes 

• Your overall debt (including credit cards, loan payments, car payments, and any other debts) 

• Your monthly expenses, including food, entertainment, utilities, etc. 

• Your total savings 

• Investments (stocks, bonds, retirement accounts, etc.) 

There are helpful mortgage calculators available online that can give you a good idea of how much mortgage you can afford. Take the time to use a few of these to make sure you have a reliable range of affordable mortgages, then decide which works best for your family. 

It's essential to consider the down payment as well. The larger the down payment, the less money you will have to borrow. You can use any funds available in your savings account, a portion of your investments, or sell property to put together a larger down payment to lower your monthly mortgage payments. In the past, many lenders expected a 20% down payment, but this is no longer the case. With a smaller down payment, however, you may be required to purchase private mortgage insurance before being approved. 

Know What You Need vs. What You Want 

When thinking about buying a home, you may have a long list of items you want in your "perfect" home. Your partner is sure to have a list of "must-haves" as well. Combine your dream lists, then start focusing on what you need vs. what you would like to have. Keep in mind that every item on your list will add to the cost of the home. Decide what you're willing to pay for and what extras would be nice if you can afford them. 

Also, consider the location – do you want a house that is closer to work? Near good public schools? In the heart of downtown or a quiet suburb? Is access to public transportation necessary? Prices can vary widely depending on location, so look at real estate websites and compare prices. 

A realtor can help you determine the best fit for both you and your budget. Realtors are also knowledgeable about costs you may not think about when looking at the list price of a home. These include inspections and closing costs.

Apply for a Mortgage 

Before you shop for a house, gather all the documents you will need to apply for a mortgage loan. When you're ready to apply, these documents may be required: 

• Your most recent pay stubs indicate a year-to-date income, including any commissions, bonuses, and overtime

• Your most recent two federal income tax returns 

• If you are self-employed, you will need to provide your tax returns and business tax returns as a Partnership, Corporation, or Sole Proprietor

• A copy of your credit report

• If you have any judgments or liens against you or your property, have any supporting documents that can show you've paid or are paying these debts

• Checking account and saving account statements for the past two months

• Proof of Homeowners Insurance

• Paperwork confirming you've paid your rent in a timely fashion, if applicable

Not every lender will need all of these documents, but the more information you can provide, the smoother the application process will go. When you approach a lender about applying for a mortgage loan, be sure to ask them which documents they need. 

After reviewing your financial situation and the required documents, the mortgage lender will determine how much house you can afford and approve a mortgage amount. Once you've chosen to make an offer on a specific house, they may require an inspection of the home to make sure the house is worth the amount they are lending you. 

Don't Forget About Insurance 

Homeowners' Insurance 

You'll notice that the list of required documents for applying for a mortgage includes proof of homeowners insurance. If you're taking out a home loan, nearly all lenders require homeowners insurance. The policy protects them in the event damages happen since they are holding the lien on your house until you pay the mortgage in full. If you lose your home to a disaster and are not insured, it's unlikely you'll be able to pay off your mortgage. 

Homeowner's insurance also protects you as a homeowner, ensuring you will be able to rebuild your home if something happens to it. Homeowner's insurance protects you as a homeowner in several ways: 

• It will pay for damages to your home for covered losses 

• It will pay to rebuild your home if damaged under the circumstances outlined in the policy

• It will provide living expenses if you temporarily have to move out of your home

• It protects you if someone is injured or their property is damaged by you or anyone living in your household

• It will protect your personal property against damage or loss

Title Insurance 

When you purchase a house with a mortgage, your lender will arrange for a title search to make sure the seller owns the house and has the legal right to sell it to you. If any liens or encumbrances show up, there may be legal issues to settle before the sale can go through. In rare cases, title searches fail, and you discover problems after the transaction is complete. If this happens, title insurance will pay for the legal expenses and protect against financial losses. 

Private Mortgage Insurance (For Some Mortgages) 

If you're putting less than 20% down on your home purchase, your lender may ask for private mortgage insurance. The policy protects them in the event you default on your mortgage. Your monthly mortgage payments usually include these costs. 

Make Your Purchase 

There are several steps to completing a home purchase once you've made an offer and the seller has accepted it: 

• If your mortgage isn't pre-approved, you will need to wait for the final approval. Most sellers give buyers a few weeks to get this accomplished.

• The seller and buyer sign a contract. Once this is approved, you are legally bound to purchase the house, and the seller is legally bound to sell it. 

• As the buyer, you should have the house inspected to make sure there are no hidden problems. If there are, you can either demand that the seller fix them, ask for a reduced price, or walk away if your contract permits it. 

• The mortgage lender will have the house appraised

• The closing will take place at a law office or title company. You'll pay some closing expenses and the down payment at this time. The mortgage company will pay the rest, often with a wire transfer. 

• You'll get the keys to your new home!