New Years Resolutions for Home Buyers

Need another reason to jump off the fence and buy a home?
 

A new study reveals that homeowners create more wealth than renters and that wealth has a bigger and more immediate impact on what we spend than wealth created by the stock market.

The study, which was produced by the Joint Center for Housing Studies of Harvard University and Macroeconomic Advisers and commissioned by the National Association of Realtors (NAR), showed that homeowners accumulate significantly more wealth than renters. An analysis showed that a renter in 1984 would have accumulated $42,000 in net wealth by 1999. A typical homeowner would have accumulated $167,000 in the same timeframe.

According to David Lereah, NAR’s chief economist, most of that $135,000 difference in wealth reflects how fast money grows when it is leveraged. In other words, put $1,000 in the bank and in a year it might earn 1 percent, or $10. But put $1,000 down on a house that costs $100,000, assuming the home appreciates 4 percent in value, you’ll earn $4,000, which is a 400 percent return on the initial $1,000 investment.

The study also found that over time, consumers spend about five-and-a-half cents out of every dollar increase in both housing wealth and stock wealth. But, consumers are far faster to spend home equity than profits from the stock market. Why? The study concluded that consumers are afraid the stock market will continue to be volatile and short-term gains could evaporate overnight.

Buy a house and get rich. Sounds like the basic tenants of the American dream. If you’re thinking about buying a house in 2005, when interest rates are still historically low, perhaps my annual list of New Year’s resolutions for home buyers can help point you in the right direction. As a buyer, I resolve to:

• Get my credit and finances in order.

Plenty of would-be buyers are paying off their credit cards, car loans, school loans, and other forms of personal debt. While having personal debt doesn't mean you can't qualify for a loan, it can lower the amount of the mortgage a lender might be willing to give you.

If you can only keep one resolution this year, choose to clean up your credit. One of the best things you can do to prepare for buying a home is to make your monthly debt payments on time. Even if you have a lousy credit history, lenders will be more forgiving if they see you’ve gotten your act together in the last six months to a year.

While you can purchase a copy of your credit report from each of the three credit reporting bureaus (Trans-Union.com, Equifax.com, and Experian.com) for around $9, you’re better off paying $12.95 and purchasing a copy of your credit report and score from www.MyFico.com, a joint venture between Equifax and Fair, Isaac.

As of December 1, 2004 residents in 13 western states get their credit reports for free. Midwestern states can access their credit reports for free starting March 1, 2005. Access for southern states kicks in on June 1, 2005, and the Eastern states plus all U.S. territories start accessing their credit histories on September 1, 2005.

To get a free copy of your credit report, go to AnnualCreditReport.com to take advantage of the free credit report offer. Don’t go directly to the credit reporting bureau’s website, or you will be charged. The free credit report does not include a copy of your credit score.

Be sure you take advantage of the legislation so you can keep your credit history good and your credit score high.

• Get my credit in shape.

Put a lid on your spending, perform “plastic surgery” on your credit cards, and don’t max out any one card or your credit score will suffer. If you’re going to cancel an account, do it in writing, but you get bonus points on your credit score the longer you maintain a credit account. So a credit card account that you opened in 1984 is worth more than one you opened last month.

Don’t forget that good credit also means job stability. Most lenders require that you work for the same employer for at least a year, and maybe two, before they’ll approve your home loan application. If you’re self-employed, they’ll want to see at least two years of tax returns before you’ll qualify for a conventional loan. If you're offered a better job in your field, by all means take it. But if you want to buy a home, try not to jump from job to job to job within a relatively short period of time.

• Know how much I can afford to spend before shopping for a home.

You have three options when it comes to figuring out how far your down payment and income will take you: You can guess; or you can pay a visit to your local lender, who will pre-qualify or pre-approve you for a loan, or you can go online.

Your lender will look at your income, debt, assets and liabilities and come up with the maximum amount you can spend on a home. Once you know how much you can afford to spend, you'll avoid making a common, heartbreaking, home buyer error: Looking at homes you can't afford to buy.

Are you too busy to visit a lender? There are several web sites that offer good mortgage information. Try E-Loan (Eloan.com), or HomeAdvisor (www.homeadvisor.com). These sites offer loans from a handful of lenders. Visit Bank Rate Monitor’s site (Bankrate.com) for a state-by-state look at current interest rates. For other lender sites, try the International Real Estate Digest (www.ired.com).

• Know my neighborhood, and be comfortable with it, before I buy a home there.

Everyone wants to live on the best block in the best neighborhood. Unfortunately, that may not be economically feasible. You might be able to afford the smallest home on the best block, but that won't do you much good if you need four bedrooms and that home only has two. Balancing affordability with location means making you may have to compromise. While you may be willing to compromise on the size garden you have, you may not be willing to change your children's school districts.

Start looking at various neighborhoods and the amenities they offer. Is there a park? Shopping? Transportation? A house of worship? Do your friends and family live close by? Be careful not to limit your choice of neighborhoods too early on in the process. Explore new areas and the housing stock and amenities they offer.

Make sure you spend time during different parts of the day and night in the neighborhoods you like. Walk the streets, go into local shops. Visit the neighborhood police department and local schools. Stop by the local park district offices and see what programs and classes are available. Drive the commute from prospective neighborhoods to your job during rush hour. Get to know the neighborhood and its residents inside and out before you buy.

• Interview at least three brokers before hiring one.

There are traditional agents, buyer agents, exclusive buyer’s agents (who never represent sellers) and discount agents. There are large brokerage firms and small neighborhood shops. You can even choose not to use a real estate agent, although as a buyer who won’t be out of pocket for the cost, there’s no reason not to use one.

Many buyers today opt to use buyer agents, or buyer brokers, who represent the interests of the buyer rather than the seller. One study showed that buyers using buyer agents or exclusive buyer’s agents paid as much as 5 percent less for their home than those who use traditional agents. That’s $5,000 saved on every $100,000 spent.

Choosing which agent to use -- or choosing not to use an agent -- can be critical to your successful purchase. Look for an agent whose philosophy and mannerisms are compatible with yours. Look for someone you can trust, with whom you wouldn't mind spending a lot of time. Look for an agent who has ample experience, and who is knowledgeable about the neighborhoods you've selected for yourself.

Make sure you interview at least three agents from three separate firms before making a choice. Each will have a different philosophy about the home buying process, and each will bring that different viewpoint to the table. Use it to your best advantage.

• Read and understand all documents before signing them.

So many folks don’t even bother to read either their purchase contract or loan documents. That’s unfortunate, given the enormous legal implications of a home purchase.

Take the time to read all documents thoroughly. Ask an attorney or broker to explain things that don’t seem to make sense. It’s important that you understand what promises have been made and what warranties have been granted, and what implications these documents have for your personal financial and emotional well-being.

NEXT WEEK: Home Seller Resolutions for the New Year

NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.