The process of buying a home can be overwhelming. I feel your pain, I’m there too. But there are several resources available. Let’s do this together, step by step, week by week. Follow me as I go through a 16-week Home Buyer Seminar sponsored by the Bedford Central Community Development Corp. in Brooklyn, New York. For free courses in your area check check with your local real estate agency or churches, as well as banks and state and county government agencies. Each week, I’ll blog on the series which will cover how to prepare for a home purchase, how to repair and build your credit, how to budget for your home purchase, the prequalification and approval process, and property maintenance expenses to expect. And if you’re a first-time home buyer, be sure to check out the 2009 Black Enterprise Homeownership Contest for a chance to win $10,000 toward the down payment on your first home.
There are a lot of unsold homes out there, and many of us are eager to jump in. The first-time home buyer’s tax credit combined with lower mortgage rates makes it easy to get blindsided from the reality of what it takes to maintain a home, which is much more work than obtaining it.
“Consider your needs versus your wants,” says this week’s presenter, Leon T. Gelzer, Sr., a real estate professional for Joseph Felix Realty. “This is an opportunity to get in and stay in.”
In order to stay in your home you need to be honest about how much home you can afford. According to the Mortgage Bankers Association (MBA) many homeowners are already at the financial edge—43% spend more than they earn a year, 52% live paycheck to paycheck, and 42% of homeowners do not have 3 months reserves to live on.
You can check out Yahoo! Real Estate’s How Much House Can I Afford Calculator to estimate the maximum home price for which you may qualify based on your income, credit rating, current monthly expenses, down payment and the interest rate. Although this is useful it is best to visit a lender to find out for sure as they do no take in consideration future rental income and monthly debt.
Once you’ve determined how much home you can afford, consider the upfront and ongoing cost. Upfront costs include the down payment, closing cost, move in cost, and reserves.
Down payment: This is generally 20% of the home sale price. Buyers putting down less than 20% are normally required to take out private mortgage insurance (PMI). This is paid by a borrower (you) to protect the lender in case of default on the loan. But there are resources available to those who can’t come up with the 20%. Look into FHA loans. These loans are backed by the Federal Housing Administration and guarantee payment in case of default by the owner.
Closing Cost: The typical closing cost is between 4%-6% of the mortgage amount.
Move-in Cost: This cost can vary. Gelzer recommends that you hire professionals to help you move because you can get a deduction off your taxes.
Mortgage Reserves: As a general rule of thumb you should have at least 6 months worth of mortgage reserves to allow for emergencies and unexpected vacancies.
Utilities, maintenance, and repairs are all part of your ongoing costs.
So, now you know what you can afford and other cost to consider, but how do banks grade mortgage applicants? Banks look for the 4 C’s of Credit—Capital, Capacity, Credit, and Collateral. Gelzer explains each:
Capital: The banks want to see that you have had the full down payment in your savings for the past two months before they can approve your loan.
Capacity: The banks want you to verify that you have been employed for the last two years by reviewing your current pay stubs and tax returns to ensure you can manage and repay the mortgage loan.
Credit History: The banks will run your credit report to see your creditworthiness to ensure that you are in good standing with your creditors and verify your monthly debt.
Collateral: When your capital, capacity, and credit history is reviewed and you find a home and apply for a mortgage loan, the bank orders an appraisal to ensure that the property that you are purchasing is worth the amount of money that they are lending you.
We’ll pause here for now. The goal is to digest this wealth of information in bite-sized chunks. Check back next week where we’ll go through the process of qualifying for a mortgage.
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