Buying a Home
Start by defining your goals. Consider where you want to live, the features you're looking for, what you can afford, and a realistic date for having the money you'll need. Then apply your knowledge to making this key decision.
The actual amount you'll spend to buy a home depends on the part of the country you live in and the type of home you want. While the dollar amount will vary, certain guidelines apply wherever you buy.
It's likely that you will need cash for a down payment and will get a mortgage—a long-term loan you use to buy a home. Traditionally the down payment has been between 10% and 20% of the sale price, though there are some government sponsored programs that let you put a smaller amount down. But the less you put down, the larger your mortgage payments will be and the greater the risk that you will default, or not be able to make your payments.
What a mortgage costs depends on three factors: the principal, or amount you borrow, the finance charge you pay for using the money, and the term, or length of time the mortgage lasts. You should also expect to pay an up-front interest charge to your lender, of one or more points. A point is usually 1% of the mortgage amount.
When you apply for a mortgage, you will have to qualify to be able to borrow. Typically, lenders require you to spend no more than 28% of your monthly income to repay the combined total of your mortgage loan, property taxes, and homeowners' insurance. For example, if your gross pay is $54,000 a year, or $4,500 a month, your housing expenses could be up to $1,260.
Most lenders also consider your other financial responsibilities, including car payments, personal loans, college loans, and other debts. They don't want these expenses—plus your housing costs—to be more than about 36% of your monthly income. In short, they want to be sure you'll be able to pay your mortgage before they let you borrow.
Be aware that affordability and qualification are not the same thing. Just because you qualify for a certain mortgage doesn't mean it's wise to borrow that amount of money. Establish a set budget to ensure that you can afford this new commitment and prepare an emergency fund to help bridge the gap if something unexpected happens.
If you're unsure where your credit stands, check your credit report. Everyone is entitled to one free credit report each year from each of the three major credit reporting agencies.You should check with potential lenders to find out which agency they use to determine your credit health, since scores from different agencies tend to vary.
If you're turned down, ask why. The lender should tell you which credit score and credit report they used to check on your credit history. If there are any obvious errors, follow the instructions on the report to have them corrected and check up on your request. If the negative information is correct, and your credit history has flaws, at least you'll know the factors that may be blocking your application and can begin to strengthen your credit credentials.
It is illegal for lenders to consider your age, race, gender, marital status, or religion as factors when evaluating your mortgage application. If you believe you’ve been discriminated against, take action. File a complaint with the U.S. Department of Housing and Urban Development, report the violation to the appropriate government agency provided by the lender, or check with your State Attorney General’s office to see if the creditor violated state laws.
A real estate agent can provide valuable assistance in buying a home. An agent knows what's available in a particular neighborhood, what the price trends are, and how current asking prices relate to actual sales prices.
You can look for an agent the same way you look for a financial planner or other professional. Ask your friends and family for recommendations, check out your local resources and various real estate websites, and interview several people before you decide on the person to work with. It could turn out to be an extended relationship, and you want it to be a productive one.
Traditional real estate agents and the real estate firms that list homes for sale are paid by the seller and represent the seller's interest. That doesn't mean that, as a buyer, you can't establish a good relationship with sellers' agents or use them to find a home at a price you can afford. Some buyers, though, prefer to hire buyers' agents to represent their interests and negotiate the sale price and contract terms.
Because purchasing a home is a huge investment, you need to take the time to weigh the benefits of renting versus buying a residence.
Renting may be a smart financial move for these reasons:
- You probably won't pay property taxes and upkeep directly, though your rent may reflect these expenses.
- With no money tied up in real estate, you should have more cash or savings to invest, which can produce more growth than real estate.
- You run no risk that the value of your property will decline.
- Renting gives you more mobility to take advantage of a job opportunity in a different area.
Buying a home has its advantages as well:
- You can deduct the interest on your mortgage and your local property taxes on your tax return, which can reduce your taxes and free up cash for investing. You can decide between taking the standard deduction (In 2023, that's $13,850 for single filers, $20,800 for heads of household, and $27,700 for married taxpayers filing jointly) or itemizing.
- You build equity as you pay off your mortgage, increasing your share of the property's value.
- You may be able to get a home equity loan or line of credit where you borrow against the part of your home that you own. These options generally have lower interest rates than personal loans and you can often deduct the interest you pay on your taxes.
- If your house increases in value over time, you may make a profit when you decide to sell.
- While the effects are harder to measure, owning a home has enormous emotional advantages.
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