Should I buy a house if I am planning to move in four years?
This is not a simple yes or no question. There are financial and lifestyle considerations. Let’s start with the financial.
When you buy a home, you will incur costs for doing a title search, obtaining title insurance, and getting an appraisal and inspection. If you are borrowing to buy the home, you will likely also incur lender costs such as an application fee, processing fee, origination fee and other costs.
When you sell a home, you will likely have to pay a real estate brokerage commission and various other costs to close with the buyer.
All said, you will be out of pocket for an amount equal to about 10% of the cost of your home. So now you need to do a comparison. Will your housing costs be less than the cost of renting? How much will you save in income taxes due to being able to deduct mortgage interest and real estate taxes? Are home values in your area going up, down or staying the same? If they are going up, how much of an increase would you expect in four years?
If your housing cost savings, tax benefits and expected home value increase exceed the 10% cost, then it will make financial sense.
Even if you are not ahead on a financial basis, next consider your lifestyle. Will living in a home you own allow you to have a garden, a pet, a more stable lifestyle, housing in a safer area, be closer to amenities, work, family or other factors high on your location choice hierarchy? If the answer is yes, then it may be worth it, even if there is an incremental financial cost.
Chapter 2 – How Much Can You Afford?
I’ve saved up 10% of my expected home cost for a down payment. Should I buy now or wait until I have 20%?
You need to consider what you are trying to accomplish by saving for a bigger down payment. If, what you are saying is, that you plan to buy the same cost of home regardless of down payment size, then putting down more will allow you to either reduce your payment size or shorten the amortization term of your loan. Both will save you a lot of money in reduced interest payments over the life of your loan. You can use the KHBAN table in chapter two to figure your payment or term reduction options, and your resulting interest savings.
If however, you will be tempted to use the extra down payment money to actually buy a more expensive home and get a bigger loan or longer term loan, you may end up no better off, and maybe even worse off, from an ultimate interest payment standpoint.
Chapter 2 of the Finding Home book helps you to understand how down payment size, interest rate, loan amortization term, and money payment work together. You need to make sure that you can afford the resulting monthly principal and interest payment, plus your other housing costs, after closing on the loan.
And remember, you need to have saved enough for your down payment, plus closing costs, plus the costs of preparing and moving into your new home.
Chapter 3 – Credit Reports and Scores
My credit report shows a loan I paid off as still outstanding. How do I get this fixed?
If you dispute an item, you should contact both the credit bureau and the company that provided the information to the credit bureau. You should clearly identify each mistake, state the facts, and provide an explanation of why you think each is wrong. You should provide copies of documents, if needed, supporting why certain information is inaccurate. Do not include originals of the documents you use to support your dispute. Always send photocopies or images.
What can I do to increase my credit score?
Get any errors on your credit report fixed. Pay your bills on time. Do not run up big balances on accounts that you do not immediately pay down. Reduce your credit card utilization ratios by paying the accounts off in full each month or keeping a smaller percentage of your allowed credit line outstanding. Do not close existing accounts even if you are not using them unless you are being charged fees to keep the accounts open; this shows you have unused credit available to you. Avoid hard credit inquiries.
How can I obtain a copy of my credit report? I heard that I can get a copy for free. Is that true?
You are entitled to one free credit report per year. Go to AnnualCreditReport.com to get it.
What is contained on my credit report and how do lenders use the information?
For a more complete explanation, read chapter 3 of Finding Home. Your credit report contains identifying information, credit information, public record information, inquiries, and your credit score. Lenders use this information to assess your demonstrated willingness to repay your debts, your history of timely repaying your debts, your current debt burden, and information about judgements, bankruptcies, foreclosures, charge-offs and other negative financial items on your record.
Chapter 4 – Saving, Budgeting and Managing Your Finances
I have a hard time budgeting. Is there a shortcut?
The best shortcut I have seen is to simply budget only your fixed monthly expenses. But, very importantly, include as the first item in your fixed monthly expenses, an amount that you are going to pay into your savings. Then list all you other fixed amounts by order of priority. See how much you have left over after that. You will still have fuzz and blur in your spending, but if you do pay yourself and your fixed expenses first, you will be making progress.
Chapter 5 – Borrowing to Buy Your Home
My mortgage broker wants me to sign my application with many blanks on it. He says do not worry, he will fill them in, that it is standard practice. What should I do? Is is ok to do what he is suggesting?
No, it is not ok to sign blank forms. If your broker wants to help out by filling in sections of the forms based on personal documents that you have provided, let him or her. But then have the broker present you with the completed documents. Review all the documents carefully, and only when you are satisfied everything on them is true and accurately describes your situation you can sign them.
You need to be very careful in the mortgage application process or you may find yourself the unwitting victim of mortgage fraud or identity theft, or a potential accomplis to mortgage fraud on the lender. Chapter 5, Part 3 of the Finding Home book goes over the do and don’ts.
After the first communication with a lender, a borrower will get a copy of a Loan Estimate (LE). How it should be read, what does each line mean, how do I compare it to other LEs from other lenders?
Can my mom be a co-signor on my loan?
Anyone can co-sign on your loan. By co-signing, your mom, or anyone else, is effectively putting their credit standing on the line, saying if you do not pay, the co-signor will. If neither party pays, the credit of both will be damaged. For this reason, you should be very cautious about ever co-signing on someone else’s loan, and you should take very seriously the potential burden you are placing upon your co-signor if you do not pay.
What about co-borrowers, should I have a co-borrower with 600 FICO score?
In the eyes of your lender, the co-borrower shares responsibility for payment of the loan. A co-borrower with a low credit score will not help, and may hurt your chances for getting a loan. If you become a co-borrower with a low credit score individual, realize you are taking a very real risk that the other party will not be able to pay the amount you are expecting them to pay on the loan. If you cannot make up the difference, your credit will be damaged too, and you may lose your home to foreclosure.
Can I just compare APR when deciding on the best deal?
Should I get 5-Year ARM or Fixed rate mortgage loan?
If you obtain a fixed rate mortgage loan, you will always know what your principal and interest (P&I) payment will be. No matter what market interest rates do, your monthly P&I payment will not change. A 5-Year ARM acts like a fixed rate loan for the first five years. After that, your payment can change based on adjustment rules contained within your note. Usually, the starting interest rate on a 5-Year ARM will be slightly lower than the rate on a fixed rate loan. Then the rate can adjust periodically, up or down, depending on what market interest rates do and adjustment terms within your note. If you think rates are going to decline, or if you are reasonably certain you will be paying off your loan is less than five years (due to a planned move, or refinancing), then the 5-Year ARM may be right for you because of the lower starting interest rate. If not, it may be best for you to opt for payment certainty afforded by the fixed rate loan.
Do I get a 15, 30 or 45 day rate lock or can I let the rate float?
When should I be paying Points vs getting higher rate?
Points are an upfront cash payment you make to your lender in exchange for a lower interest rate on your mortgage loans. Lenders often will offer you trade-offs between the interest rate you pay monthly on the loan and the amount of points you pay upfront at closing on your loan. Points are expressed as a percent of the loan amount; e.g., “2 points” means a charge equal to 2 percent of the loan balance.
Find out from your lender what the rate versus points options are. A lower interest rate on your loan results in a lower payment. There is a breakeven point at which the cumulative savings you achieve on your monthly payments will equal the amount you paid in points. If you keep your loan outstanding longer than the breakeven number of payments, you will benefit from paying the points and receiving the lower interest rate. If you refinance your mortgage loan or move prior to that number of months, you would have been better off taking a higher rate and not paying the points.
Your lender can help you determine the number of months to the breakeven point under each option. Then you can make your decision based on how much you have available for closing costs, how much you can afford for a monthly payment, and how long before you would expect to refinance your loan or pay it off because you will be selling your home and moving.
Do I have a choice of lenders? How do I know if a lender is right for me?
Depending on your financial and credit strength, you have many choices of lenders available to you. Search for lenders with not only the lowest rates, but also terms that best meet your needs. Terms include the amount of down payment and closing costs required, the maturity and amortization term of offered loan programs, the ease of working with the lender, whether they have an easy to use website, and other factors meaningful to you.
From a cost standpoint, you can have several of your top choices provide you with a Loan Estimate (LE), showing the rate, costs and terms they would offer to you. The format of the LE is standardized, so you can easily compare what each lender is offering.
Chapter 6 – Starting Your Home Search
Where should I start my search for my home
You need to consider what your needs and wants in terms of location and home features. Chapter 6 of Finding Home presents the tools you need to narrow in on geographic location starting with country, state, county, and city, then focusing in on neighborhoods and specific homes. It helps you to determine your own Location Choice Hierarchy. Read the Chapter, and download and use the many tools made available to you in the Downloads section of this website.
Chapter 7 – Looking at Neighborhoods and Homes?
Who pays my real estate agent's commission?
In most cases, the listing broker has agreed to cooperate with and pay the buyer’s agent a commission. That means you have full representation at no out-of-pocket expense to you and it does not inflate the cost of the home! In 9 out of 10 cases, the listing broker has agreed to cooperate with and pay the buyer’s agent a commission. That means you have full representation at no out-of-pocket expense to you and it does not inflate the cost of the home! Research has shown that consumers who work with a buyer’s agent receive a better value than those who do not.
In 9 out of 10 cases, the listing broker has agreed to cooperate with and pay the buyer’s agent a commission. That means you have full representation at no out-of-pocket expense to you and it does not inflate the cost of the home! Research has shown that consumers who work with a buyer’s agent receive a better value than those who do not.
Why should I work with a real estate agent?
Whenever you make a large financial decision, it makes sense to consult with an expert. Buying a home may be the single largest purchase you make. A buyer’s realtor will help you with every step along the way. Having someone who knows the ropes advising and working with you will save you time and help you to avoid mistakes, especially you first time through the process. Buyers who work with a buyer’s agent usually receive a better value than those who do not.
Is there a difference between an agent and a REALTOR?
Yes, a REALTOR is a real estate agent who holds membership in the national, state, and local real estate boards. Through this membership, a REALTOR is held to a standard of ethics and a strict code of conduct. This does not guarantee that a REALTOR will do a better job for you that a real estate agent, but it increases the odds.
I’ve saved up 20% for down payment but I’ve only $XXX,000 in my 401k, can I afford a house?
Chapters 2 and 4 of the Finding Home book can help you sort through this question. Part of the answer will depend on your age and how close you are to retirement. Part depends on you ongoing expected income which you will use for your housing and living expenses, and how much you will have left over that can continue to be put towards your 401K and other savings needs.
How much are you putting towards housing costs right now? If you have managed to save 20% towards a down payment and put money into a 401K, chances are good that you will be able to continue building your 401K after buying your home. Use the chapter 2 and 4 download templates to figure out your monthly income and expenses and the amount you have available for savings now and after a home purchase. The KHBAN template in the chapter two download files will help you determine the amount you can afford to pay for a home, and tell you the resulting mortgage payment you will incur.
Do the analysis with the tools provided. In the end, you will have to determine how comfortable you feel, but my guess is that you will be able to do it.
Chapter 8 – I Want That Home! What Comes Next?
How do I prepare and present a well constructed off?
You should work with one or more experienced advisors, including your real estate attorney and REALTOR. Do not make an offer without professional assistance. Make sure you include adequate contingencies within your offer, based on the circumstances. Chapter 8 of Finding Home goes through this in detail.
Chapter 8 – I Want That Home! What Comes Next?
Do I need to get the home inspected?
Yes, you should get the home inspected, and you should make the contract contingent on the findings. You are about to spend tens or hundreds of thousands of dollars. You need to know what potential problems may exist with the structure, wiring, plumbing and other crucial systems within the house. If significant problems exist, you may be able to get the seller to pay to fix them. If really bad things are found, you may need to walk from the deal.
Chapter 9 – Pre-Closing Preparations
What is title insurance and why do the lender and I need it?
When you purchase a home, generally you have to pay for two title insurance policies, one for your mortgage lender and one for you. Under terms of the policies, the title insurance company will pay for any damages the lender or you incur if it is found later that someone else has a claim to all or a part of your property. The title insurance policy issuer is required to either correct any errors or pay damages resulting from any ‘cloud on title’, encumbrance, or title flaw in the title that was not reported or recorded correctly.
What types of insurance will I need?
Before closing you will need to have homeowner’s insurance in place to protect against damage to the property and you possessions, as well as to provide you with coverage against liability if someone is hurt on your property. Chapter 9 goes through the other types of insurance which you will want to consider depending on your circumstances, including homeowner’s warranty, flood, earthquake, life, and disability.
Chapter 10 – Closing
Three days prior to closing, my lender provides me with a Closing Disclosure (CD). How should it be read, what does each line mean, and what should I be looking for?
The Closing Disclosure (CD) is the primary document summarizing the terms of a home loan, which is called the Closing Disclosure, or CD. It is a five page form designed by the CFPB to help home buyers understand the key features, costs, and risks of your mortgage loan. Review your Closing Disclosure and make sure you are getting the loan you expect. Creditor compliance with lending rules is based on a comparison between the content of the Loan Estimate (LE ) and the final executed CD. If you actually pay more on the CD than disclosed on the LE, the creditor must refund the increased amount to you and submit a new (revised) CD you. The timeframe in which the creditor must do a compliance review and issue you a refund if necessary is no later than sixty days after closing.
Chapter 11 – Packing and Moving
How do I prepare to move in?
You will want to paint and clean before you move in. Also, make sure your utilities, internet and perhaps cable are turned on before you move in. Get lots of boxes and packing materials. Arrange for a moving company, and/or a truck, friends and family to help you pack and move. Do not waste anyone’s time. Be prepared organized.
Chapter 12 – Become a Homeowner
I just closed. What should I do first?
Make sure your get the keys to the home, garage door openers, and security codes from the sellers at the closing. Go to your new home and change the locks, garage door opener codes, and any security codes. Locate your electrical breaker box and water shut-off valves. Once the premises are secured, you can start the loving process of making it your home to live in and enjoy.